asset liquidation & US Treasury curve flattening forcing adjustments…(Tuesday)

After a quiet Asian session, activity and volumes have picked up markedly during the European session. Most asset classes are under pressure, with cash being king ahead of quarter end. As of 8 AM ET, Treasuries are bear flattening with belly 2.5 bps worse and long end/front end 1.5 bps worse; meanwhile, equities are under mild pressure ahead of the cash open.

The Asian session opened to slightly better Japanese real money selling of US 7s, but Asian real money walked in to better interest adding 10s; with some decent RV buying of 5s and a bid to JGBs into the MoF 30y supply, Treasuries and JGBs rallied slightly in tandem. The JGB 30y went well, with 20-40y sector of JGB curve rallying 1.5 bps into and after the issuance; one Japanese dealer taking down 41.5% (yikes!) of the auction also supported. Post supply, better interest to pay in belly of USD swap curve, notably Japanese corporate account paying 5y, along with some set up ahead of JGB 5y at week’s end took Treasuries back to flat in an otherwise listless, light-volume session. Elsewhere, Aussie rates traded heavy, supply set up again an issue there as rates backed up 2-3 bps in flattener on Aussie curve. Asian stocks were mixed: NIKKEI rallied 1.3% on asset allocation trade along with M&A chatter, while Hang Seng was off .72%, Chinese bourses were mixed, and Asian EM was under minor pressure.

From the outset in London, activity and volume spiked. Hedge fund was aggressive seller of US 10s, with RV account selling US 3s ahead of today’s supply. Gilts then joined in, with dealer and RV concession trades ahead of the 30y supply; bunds were largely dragged lower to start by the pressure on Treasuries and gilts. The belly of the US curve led the move lower, pressure increasing after block flattener, $860K of DV01 in flattener was done at 2:42 AM ET, with a sale of 18,034 FVZ8 for 112-29+ against a buy of 3228 WNZ8 for 157-08. The flattening of the last two days is rather ironic given all the press and hand-wringing around the passing of Sept 15, the deadline for pensions to add fixed income securities before regulatory changes make it far less attractive. There are numerous pieces out explaining the flattening (i.e., strong AHE is bear flattener, dealers are front-running the last pension buyers, always demand for the first reopening of the new bond, yada yada). Back to reality now, the flattener was followed by slightly stronger UK employment data, ironically highlighting the higher AHE in the UK, that brought us another leg lower in fixed income led by seller of gilts ahead of the supply, an event that saw sloppy bidding and a large tail for the 30y paper. Once the auction was out of the way, better bidding for UK 10y and ultra paper materialized, taking Treasuries and bunds off their lows. A block buyer of $381K of DV01 in 5y sector came through at 6:39 AM ET, with the purchase of 8066 FVZ8 for 112-27.75. Since NY walked through the door, Treasuries have traded sideways, 1.5 -2.5 bps worse across the curve, with the belly continuing to underperform ahead of the 3y auction.

Today in the US, we get JOLTs data at 10 AM ET, along with wholesale inventories/sales. There are no Fed appearances or events scheduled for today, so most of the session will be about corporate deals pricing and Treasury’s issuance of $35BN in new 3y notes at 1 PM ET.

This flattening on the USD curve has been interesting and caused a bit of consternation to say the least, especially given how much the regulatory changes for pension funds were supposed to spell doom for long end support. However, there is month end ahead, there is a good amount of long end supply that has already been rate-locked, and there is the normal safety of the bond. So just goes to show you that you don’t believe every logical piece you read when it comes to trading 30y sector. For choice today in TYZ, call the range at 119-15 to 119-26+. Leaning slightly bullish within a bearish recent range after yesterday’s quiet but interesting reversal day higher formation in TY sector; let’s see if we get follow through on the upside. If we take out 119-26+, we’ll get into the single prints from Friday that run all the way up to 120-03; above there, resistance comes in at 120-06+, then 120-12+. Support below 119-15 comes in at 119-11, 119-06+, 118-27+, and 118-24+.

That’s enough for this Patriots Day….