Any semblance of Monday night/Tuesday’s seeming order and bounce in risk disappeared in moments yesterday afternoon when the US long end got completely smoked on the combination of issuance in the long end and RV unwinding massive curve flatteners as the fiscal stimulus plan jumped from $800BN to over $1TRN. It has been a crazy ride on very light volume thus far today, with Treasuries initially rallying during the Asian session on early limit down move for equity futures, but coming under MASSIVE steepening pressure during European hours. As of 9 AM ET, Treasuries were massively steeper: 2s at 2 bps lower in yield while 30s are 12 bps higher in yield from 3 PM ET marks yesterday. Meanwhile, US equity index futures are limit down 5%, where they have stayed since just after 1 AM ET. SPY projects an open down 7.5% right now.
Even though the Administration’s fiscal stimulus plan continues to grow and even after the Fed announced late yesterday that is was officially forming the PDCF (Primary Dealer Credit Facility, offering overnight and up to 90-day funding that can use a range of collateral, but most importantly CP!), equities stumbled badly on the futures reopen as once again “Balloon Tuesday” held true to form and we are back under pressure on Hump Day Wednesday. There was actually better selling in the belly of the curve during the early Asian session, with Asian banks again punting 5s and paying in USD 5y and 7y swaps. There was some deal-related hedges that were unwound early in the session, dealers lifting US 30s. Central bank again bought 2s and a smattering of mortgages, while RV accounts pre-shadowed the European theme by being better sellers of US 10s and 30s to receive in USD 2y and 3y swaps. After Tokyo lunch, US fixed income flat-lined into the European open with volume non-existent given that US equity futures were lock limit down and Treasuries were repriced.
Locally during the Asian session, JGBs got smoked, partly in deference to the US move from Tuesday, but it didn’t occur until after the Tokyo lunch. JGB long end rates backed up a whopping 18 bps, led by JPY 30y swaps. There was large RV unwind of “JPY receive 30y” positions that drove the flow in an illiquid market. Sound familiar? Aussie rates were steepening before that, but the move in JPY rates accentuated more steepening in Aussie and Kiwi rates late in their respective sessions as well. Japan 10y rates were 8 higher on the session, Aussie 10s closed 15 bps higher, and Kiwi 10s ended 20 bps higher. As for equities, it was another day of red, although losses were limited on the major bourses to 1-2%, except for a 4% drop in Hang Seng.
The open of the European session turned everything on its head. For Treasuries, we were back to being at the mercy of the RV community, a group that wasted little time selling 30s outright and on the curve against 3s and 5s today; as an aside, don’t think this is the trade RV “wants to play” as word is these are still efforts to stem the bloodshed, which stinks. 10s saw better selling by dealers, but macro fund was quick to step in and aggressively lift 10s against bunds, while also buying FVM contracts against OEM (bobl). Peripherals got slapped again, even as ECB works hard on “Coronabonds” (CCFF) to bail out the peripherals. Peripherals again are getting taken out to the woodshed, with Greece 20 bps wider to bunds, Italy and Spain 10 wider to bunds, and bunds 10 wider to Treasuries. OUCH! None of that is good for anyone globally, but look for this to continue. Remember when BTP 10s traded through US 10s last year?? Yeah, that spread is now 150 bps. Thin liquidity (no liquidity is probably better) saw bunds get pushed through 170.82 level in futures even just before the regular day session and CTAs were aggressive sellers of RXM and UBM (Buxl) futures early in the session. Every scheme to prop up risk is met with more selling by the bund vigilantes, as witnessed by utterance from ECB that the ESM has over EUR 400BN available to lend or back stop. Comments that ECB stands “ready” to help peripherals only seemed to generate more pressure. European equities are down between 4 and 6% right now, led by the CAC and the DAX.
The buyback schedule for the Fed begins at 9:40 AM ET and ends at 2:10 PM ET today, another 6 tranches on tap. After yesterday’s awful performance for TIPS, even into the buyback and certainly after the buyback, Fed will double the size and take at least $5BN (1-1:20 PM ET, 1y to 7.5y sector today); I mention this because the Fed is ready to deploy wherever there is a leak in the dam. Hopefully they don’t run out of fingers….
As for some thoughts today, want to buy some gamma on 30s. Look, spreads are going to be everywhere, I mean everywhere. Even when spreads come in (see 30s yesterday, hello gap!), in this market that’s a vol supportive idea. Curve will steepen further, again vol supportive, negative rates in the front end even more vol supportive. If you have exposure to short gamma in long end, you have to pay up and bite the bullet. Thinking conditional steepener idea, as in like synthetic call (I never was good at selling the 10-legged curve trade!), so look at USM 158 puts for 9.75 BPV, meaning around here you buy the put for 1-10/64 and buy 15% USM for 171-00. That’s a 19.13% price vol which is scary on sticker price, but 9.75 bps per day???? HA! We did 3 times that between 3 and 5 PM ET yesterday. Think about it. Andy, Mike, and I are around if you want to chat further.
As for today’s range in TYM, for choice let’s call it 136-12 to 134-15, after overnight range of 136-00+ to 134-02+. This is tough to grasp, we take out yesterday’s high after being under pressure all night??? But stranger things and the numbers called the break lower in rates yesterday, so have to see. Will say, take out this 134-15 though and it will be “Katy Bar the Door” to 1.25% equivalent in cash 10s (roughly 133-27). As for resistance today, watch 135-04+, 135-15, 135-27+, 136-08+, 136-12, 136-16+; support comes in at 134-15 level, 134-02+, the ugly 133-27, 133-17, 133-09+/11, 133-01.
Good luck out there on this miserable Hump Day,
mjc