back from holiday for what should be a most interesting week…..(Monday)

It promises to be an interesting week in the markets, with the week kicks off to slight risk off. There are any number of events (including US inflation data and monthly long end supply) , plenty of geopolitical theatrics, and the highlight of the week will be Powell’s semiannual assessment of the economy on Weds (House) and Thursday (Senate). As of 8 AM ET, Treasury curve is flatter, with 10s unchanged, 30s .5 bps better, and 2s .5 bps higher in yield, while US equity index futures mark time ahead of the cash open at marginally softer levels.

The Asian session opened to slight risk off after Turkey’s Erdogan sacked the country’s central bank head, Iran continues to flaunt any uranium-enrichment control, and DB finally announced its restructuring that will result in large job losses. JGBs and Aussie rates repriced on the open, backing up 3 and 6 bps respectively before bouncing. Treasuries underpinned Asian fixed income, as the theme was “buying the Friday back up” for Treasuries throughout the Asian session: Japanese real money lifted US 5s and 10s, while Asian real money lifted 10s. That theme continued through the Asian session as 10s rallied 3 bps between the Asian open and the London handover. Asian central banks were small sellers of 3s and 5s, with hedge funds looking to add 2s10s and 5s10s flatteners after the Tokyo lunch. After front end pressure subsided, there was better screen buying of EDU0 and EDZ0 (red sept and red dec) ahead of the London open. Locally, the bid to Treasuries helped JGBs and Aussie rates halve their losses, with JGB 10s closing 1.5 bps higher in yield while Aussie 10s closed 3 bps higher on the session after a fairly well-received 10y auction. Chinese stocks led the risk-off trade in Asia (for reasons that I have still yet to see, although somebody claims it’s a flood of IPOs in China???), down over 2.5% in both Shenzhen and Shanghai, while Hang Seng was down over 1.5% and NIKKEI was down 1%.

The European session opened to better buying in the long end of bund curve, outright and on the curve, continuing the theme of Treasuries during the European session. A soft German IP number (+.3% vs expected +.4%) was offset by better trade data. European real money added bunds outright and on the curve against schatz. RV accounts were early buyers of bobls against US 5s, while hedge funds bought TYU 125.5 puts along with RXU 170 puts. Greek bonds ripped higher to start the week after New Democracy had a good showing in local elections over the weekend; however, the joy was short-lived after the market realized Greece still needed to fund its ever-growing deficit. Peripherals are small wider with the exception of Greece amid the general risk-off climate. Gilts did their own thing, repricing 4 bps lower in yield and sitting there throughout the session as weekend papers were chock full of dour outlook for continuing political paralysis even after the upcoming elections; flatter was the theme in the UK as well. Activity slowed markedly mid-morning in Europe, Treasuries saw more central bank selling in 3s mid-morning in Europe, along with some RV selling of 3s ahead of supply tomorrow, while the arrival of NY saw bank selling of 7s and TYU contracts that have moved Treasuries almost back to unchanged in the long end.

This will be the quietest day of the week, with only consumer credit on the tap at 3 PM ET, and no speakers currently on the docket. Supply kicks off tomorrow (3y), then Wednesday we get 10y supply and Powell’s House appearance, followed by CPI, Powell Round II (Senate), and 30y supply on Thursday.

Market is chopping around since Friday after threatening to do some quite bearish things in the long end. Both USU and TYU managed to post outside reversal week lower patterns, but avoided key reversal weeks lower after managing a late day bounce to settle above the previous week’s lows. Still think that augers for a trade down through Friday’s lows (127-08+ in TYU and 154-15 in USU), but would be buying something on that move. And I think that something is the synthetic 5y call again (here’s where you stop reading if you don’t like our idea!). So like the idea of buying a TYQ 116.75 put for 2.5/64, and buying 10% delta (right here that’s 117-23+), giving you 18-day option struck 20 bps out, but real reason for this is the rally protection. Please let Andy, Mike or me know if you wish to discuss further. As for choice today in TYU, let’s call the range at 127-23 to 127-03. The high overnight was 127-23+, but we should not get through that or you have to live with a trade to fill single prints up to 128-02 from Friday; that will seriously bring into question whether we can get this reversal week satisfied on the downside. Hmmmm. As for support today in TYU, watch 127-15, the objective at 127-08 for the reversal week, 127-03, 127-00+, 126-29+, 126-24+; resistance comes in at the aforementioned 127-23/23+, 127-25+, the 128-02 level that fills single prints, 128-05, 128-07, and 128-11.

Have a good Monday….