back to the salt mine for me: BREXIT driving silly trading, so no change in a month (Wednesday)

Market is trading slightly to risk averse this late Wednesday morning in October, with BREXIT again being the focus but plenty of other smoldering geopolitical and economic trash piles just waiting for fresh fuel. As of 8:00 AM ET, Treasuries are 2-2.5 bps better across the curve, US equity index futures are small lower in sympathy with the global risk off move thus far today. So after a not-by-choice break of several weeks, figure it’s time to get back to work. Ironically (sort of) 10y yields are 1 bps higher than when I got pulled away back in early September, with the rest of the curve within 3 bps of levels from back then as well. Go figure.

One important theme that has been consistent in the last 10 days is Asian central bank and Japanese real money buying of spread product, most notably MBS. That buying was large for most of last week, tapered slightly early this week (Japanese holiday yesterday helping that) and picked up markedly today, with both account types again aggressive in their lifts during the Asian session. Central banks were also buyers of 5s and 7s from after Tokyo lunch until European open. Japanese bank received in USD 10y and 30y swaps after yesterday’s holiday in Japan, while Asian bank lifted 5s and received in USD 5y swaps. Asian real money accounts sold US 30s into the better bids, while hedge funds were seen selling 30s and 10s, along with paying in USD 5y spreads. Other levered accounts were better to unwind 2s10s and 5s30s steepeners, but in smaller strategic sizes. There was a large buyer of 20K TYZ 133 calls for 5/64 as well after Tokyo lunch. Activity was brisker during the Asian session, tapering markedly during the European session, as I am told has often been the case over the last month. Locally, the theme in Japan was more selling of the JGB long end, a theme that has been largely green lighted by BoJ over the last 6 weeks, with 20y leading the move lower ahead of supply this evening, while JGB 10s were .5 bps higher in yield. There was better dealer and RV selling in the JGB 20y sector, real money selling in 10y and 30y sectors, in some cases to move to USTs. Aussie 10s rallied 6 bps at one point before some profit taking stemmed the risk off move; Kiwi rates saw a 4.5 bps rally in sympathy with the moves since late yesterday in AUD and USD rates. As for equities, Chinese shares weighed, even though PBoC continued to inject liquidity, while NIKKEI found a short-covering bid that supported rest of Asian bourses; there was not much in the way of data or news out of Asia to move markets.

European session has seen a Brexit-induced bid to gilts and bunds that has kept Treasuries underpinned, although volumes have tapered to a dribble as the European session has moved along. The UK has been fixated on Brexit, while Europe has been fixated on the 10y bund supply out of Germany and some minor risk off thanks to Brexit. Bund puts were an early focus with macro account adding bunds as hedge against some receiving done ahead of month end and on an RV basis. The noise on Johnson’s threat to call a snap election if EU extends Brexit deadline to January 31, with Irish support for the extension from Taoiseach adding to the risk off mentality, forcing gilts higher. Treasuries saw some selling of 10s to buy gilts by macro account, paying in USD 5y swaps to receive in GBP 5y swaps, and some central bank buying of 5s outright, but volumes were tepid at best. Germany saw small concession effort ahead of the German 10y bund auction, but heavy coupon payments and redemptions and month end made for a well-received event, highlighted by solid cover and no tail. There was a buyer of 20K TYZ 132 calls for 16/64 on the pullback in Treasuries just before NY arrived, but that pullback found aggressive bidding as the Taoiseach support for Brexit extension caused more sovereign buying. European equities are mixed, awaiting some signal from US.

Today’s calendar brings us only FHFA HPI at 9 AM ET, with the Fed in blackout period ahead of next Wednesday’s next ease. At least we get a double-dose of supply to add more pressure on GC levels into month end: Treasury will auction $20BN in 2Y FRN at 11:30 AM ET and then come back to the table for $41BN in new 5s at 1 PM ET.

Okay, get pulled out of the game for several weeks and sometimes things never change. There was some good noise the last several weeks, but there is even more fun to come. In a nutshell, from my hole in the ground, it just looked like any move between 1.80% and 1.87% in cash 10s is a buy. Ironically, October has been a rather tame affair for the US markets, even though in mid-September everyone was preparing for the “October surprise.” Looks like a repeat of several years ago, when the “surprise” part gets moved much closer to year end, and just like back then in 2014, liquidity becomes a driver to add a level of pain. But I digress, and I haven’t been back long enough for that. So for choice today in TYZ, let’s call the range at 129-27+ (the overnight low as well as the high yesterday, but should get one more test) to 130-13+. Support below comes in at 129-24/25, 129-18/17+, 129-09+/10+; resistance comes in at 130-03+ (just clearing now) the aforementioned 130-13+, 130-16, 130-27+. Generally, levered accounts are not quite short enough here, and asset managers are too close to their bogeys, to give us fuel for the next move to lower rates, but notice that you have been peeling off open interest in TY and US contracts on pullbacks (i.e., long liquidation) and adding shorts on rallies, so maybe in another week or so, it will be time to add some conditional longs. I have some ideas there too, but enough for today….

Have a great hump day,