Balloon Tuesday for risk? And German court ruling muddies QE in Europe (Tuesday)

Markets trade better to risk on thus far today, albeit with most of Asia out for holiday. Risk assets all trending higher for now, with crude leading the way. The big event of the day was German court (GCC) ruling on ECB’s bond buying program (PSPP only for now, but PEPP suit will be right behind it!), which has crushed BTPs. Meanwhile Treasuries trade under pressure from combination of risk on and some set up for supply. As of 8:30 AM ET, Treasuries are flat to 4.5 bps higher in yield in a bearish steepening, while US equity index futures trade 1.25% to 1.5% higher ahead of the cash open.

Treasury volumes were better today than any day in the last two weeks, but still nothing to write home about, and largely due to a slightly bigger downside move that swept fixed income on the European open. Treasuries flat-lined through the Asian session, with Japan and China both out, and cash closed until the London open. During the early Asian session, there was very small hedge fund buying in TY futures outright and on the curve against US classics ahead of Wednesday’s announcement on next week’s refunding composition.

Treasuries traded lower shortly before the European open, as US equity index futures took another leg higher on Fauci comments that some “regions or counties” of the US could be opened soon, generally supportive of the recent positive reopening theme for the US. Later announcements of opening in CA and AZ added to the risk mentality. After backing up another 1.5 bps with no real flow other than trading inverse to equity indices, Treasuries flat-lined until the European open. Early trade in Europe saw pressure on bunds and Treasuries, with bunds and buxl pressure ahead of supply in Europe, while Treasuries saw deal-related paying in USD 10y and 30y swaps. There was RV selling of 30s against 5s, and macro hedge fund paying in USD 10y swaps and best volume of night selling TY contracts outright on the German court decision as Treasuries followed core and peripherals lower. Treasuries followed bunds back up, although bunds have outperformed on the peripheral widening in the last 3 hours.

The big story is the German court surprising the market and giving the ECB 3 months to review and report back how “monetary policy actions pursued by PSPP are not disproportionate to the economic and fiscal policy effects resulting from the programme.” The Court also said the Bundesbank must ensure bonds it holds are sold via coordinated strategy with the “Eurosystem.” In effect, the Court threatens to bar the Bundesbank from participation in any further PSPP programs, and the knock on effect is that if the Court has this large of a problem with PSPP, then the lawsuits challenging PEPP will not go well. Hence, BTPs on their wides of the day were 20 bps wider to bunds in 10y space while currently sitting 15 wider. BTPs were sold by RV accounts, macro funds, and real money, the latter piling from BTPs into bunds.

So bund and gilt yields are lower, while US yields trade stubbornly firmer here. Early pressure on gilts ahead of supply has dissipated after a a good 5y gilt and even a mediocre 8y gilt. German 10y linker after the Court decision went well, but the 26y linker found softer bidding. Austria issued in 10s and 30s, an event that was noise given the preoccupation with the German Court ruling.

There was not much that went on in Asia locally. Aussie 10y yields were 2.5 bps higher on the night while Kiwi rates were 1.5 bps higher in sympathy. The RBA made no changes to monetary policy as expected, the real event being Friday’s Statement of Monetary Policy, while set up for tomorrow’s AUD 10y auction pressured Aussie rates. Hang Seng was up 1%, while rest of equity indices that were open in Asia were all up similarly.

Today in the US, we get Markit PMI at 9:45 AM ET, ISM non-manufacturing at 10 AM. Evans (10 AM ET), Bostic (1 PM ET), and Bullard (also 1 PM) all speak today as well.

We are not moving out of this range for anything in the belly/intermediate sector. 30y yields are trying to throw off some bad signals, but reality is they can only go so far right now. Corporate issuance was $29BN in HG paper yesterday, almost halfway to the consensus number of $67-$70BN for this week, and you already have six more HG deals lined up before the day even really got going. There seems to be some interest in return of yield enhancement trades, as more so the calls in futures’ space are getting quoted, but activity remains light across the board.

For choice today in TYM, call the range at 139-02 to 138-11+, after an overnight range of 138-30+ to 138-20. Expecting more pressure on rates as day wears on between issuance and tomorrow’s refunding composition announcement at 8:30 AM ET. Support comes in at 138-23, 138-18+, 138-15+, the 138-11+ objective, 138-02, 137-28, 137-22, 137-16; resistance comes in at 139-00, the aforementioned 139-02, 139-04+/05, 139-11+/12, 139-16+, 139-19. If someone got a little more aggressive selling put wing in US, would consider a synthetic call via a 25% delta put, but it’s a little early in my book.

Have a good Balloon Tuesday and let’s see where this day takes us….