Another night of risk on theme for global markets, which is really interesting against the backdrop of reports that China is now demanding US roll back ALL the September tariffs before delegation will come to US for a “Phase 1 signing event.” There are other factors at work that are clouding the picture for the moment. Back to reality, as of 8:30 AM ET, Treasuries are 3-5 bps higher in yield with long end underperforming, while US equity index futures are a touch firmer ahead of the cash open.
There was Asian bank paying in USD 3y and USD 5y swaps from the outset last night, with hedge fund unwinding USD 5s30s flatteners (ouch) and other levered accounts jumping into USD 2s10s steepeners ahead of the supply this week. There was Japanese bank interest to receive in USD 5y and 10y swaps after Tokyo lunch, but deal-related paying out of Europe has kept spreads wider. After yesterday’s holiday (Culture Day), Japanese accounts returned to pick up right where they left off, using backup in Treasuries to again add 10s and 30s in USTs, while also buying MBS outright but in smaller sizes than recently. JGB curve steepened with spread widening on further cuts to long-end buyback today, negative rehashing of Kuroda comments from last week, and general higher rate mentality in Japan, as crazy as that seems.
A very large deal pipeline in Europe, after a surprisingly brisk issuance calendar in the US yesterday, has kept European rates, and Treasuries, on the defensive. Deal-related paying was active in Europe along curve from EUR 5y out to 20y (mostly related to Shell and Chinese issuance in EUR), but Treasuries saw paying in USD 10y and 30y swaps on talk that AbbVie would announce USD-deal after its success in EUR pricing. In the last hour, EUR swap spreads have started coming in as the deals are all pricing this afternoon.
The other interesting development overnight was some pretty active interest in US options on rate futures which were more active overnight than normal, and worth the note this AM, starting with block trades:
*Short Dec 80/82/85 put tree sold 40K times at 9 bps on block at 7:58 PM ET (unwind of trade done 2 weeks ago)
*FVF 118.25/118.75 put 1×2 ratio bought 20K times for 1/64 on block at 11:07 PM ET
*USF 155/157 put spread vs USZ 159 put, put spread bought 7500 times for 26/64 credit on block at 2:05 AM ET
*FVF 118/118.5 put spread vs FVF 120.25 calls and buying 33% FVH0 for 118-23 bought 30K times for 2.5/64 (buy put spread and futures, sell call) on block at 3:28 AM ET
*Short march 92/93 call spread vs 5% EDH1 at 98.55+ bought 15K times for 1 bps on block at 4:19 AM ET (10K) and 4:31 AM ET (5K).
There were also good volumes going through on the screen:
*Short Nov 80 puts bought 16K times for .25 bps
*TYZ 130 calls bought 5K times for 14/64
*TYZ 128.75 puts bought 5K times for 13/64
*FVZ 119.5 calls bought 10K times for 4/64
Out of 9 trades, 8 were buys, with the 9th (the short dec put tree) being an unwind of a trade from late October. All 9 trades were actually buyers of vol as well. Hard to detect a directional view in the trades as you saw decent two-way, but is interesting that we continue to see the heightened interest in adding “downside” protection since 8:30 AM ET on Friday, when for days before all everyone did was avoid, neutralize, or try to short higher rate protection. Relevant point here is that dealers are finally getting the concession they need to make this week’s supply force-feeding taste a bit more palatable, gets some further issuance done (and thereby allowing for more stock buybacks!!), and cleaning up some bad positions. Pretty crazy: 10y yield at 1.83% is right where it was last Tuesday after it rallied all the way down to 1.67% on Friday morning.
Today’s calendar after Trade Balance was largely a nonevent at 8:30 includes Markit PMI at 9:45 AM ET followed by JOLTS and ISM Non-Manufacturing at 10 AM ET. Fed calendar includes Kaplan at 12:40 PM ET and Kashkari at 6 PM ET. More importantly, Treasury will begin the Q4 refunding with $38BN new 3y notes at 1 PM ET.
So the backup continues in earnest here, with 10y yields now breaking thru support at 1.81% as more corporate deals line up since NY walked through the door. China deal and Shell deal in EUR are very heavily oversubscribed, and swap spreads are already reversing earlier pattern to gap in ahead of the pricing. The 1.875/1.89% level is still key to buy against and think you have a legitimate shot of seeing those levels before Thursday afternoon. Just not sure how much you want to tempt fate here, but I don’t think market will rally that aggressively in the near term, so greed can work. As for range today in TYZ, for choice let’s call it 129-17 (overnight high was 129-21, with daily pivot all the way up at 129-23+!!!) to 128-31+. Key support comes in below there at 128-25+, with further support at 128-20+, 128-16 and 128-08+. Resistance comes in at 129-09, 129-12, the aforementioned 129-17, 129-23+, 129-27 and 130-03.
Have a good day and stay awake….