Markets are right back in bunker mentality after the crazy ride of Sunday/Monday, as funding that we have been warning about for two weeks takes center stage again. The big news is talk of a Mnuchin proposal for additional $850BN of fiscal stimulus, but talk is that it includes a payroll tax portion that seems to be a non-starter in some parts of Congress, along with 3ml setting a 16.25 bps higher at 1.05188% (expected was closer to .90%) as funding is locking up. As of 10 AM ET, Treasuries are 1-6 bps higher in yield in yet another steepener, while US equities have given up all their gains from overnight and trade flat to marginally lower.
US equity futures opened better bid on some early short-covering, as Asian indices were better bid on the global stimulus hopes. Despite the lack of any volume, the short covering continued in US equity index futures until we hit the 5% circuit breaker at 2498 in ESM0. Crazy is as crazy does. Futures bounced around at those levels until shortly after the European open, when word of Mnuchin’s plan was not taken as positively as one might hope. Add to that the rather large miss in 3ml setting and equities broker lower on the session just before NY walked in. They have steadied a bit since then, but it a tenuous hold for now. Asian bourses closed mildly higher in Japan and on the Hang Seng, while China was small lower and rest of Asia was down small save a 5% crazy rally in Australia after Aussie rates steepened aggressively on positive vibes off their stimulus measures. European stocks have struggled all session, soft German ZEW (-43.1 vs last of -15.7 and estimate of -30) along with peripheral credit issues both weighing on risk, as equities in Europe are off between .2% and 1.2%.
Volumes overnight were about 50% of average in fixed income, but a bit more thematic than the debacle that was Monday’s session. Asian banks resumed their hedging programs after lifting some hedges last week and Monday, as that community was better to sell 5s, along with paying in USD 2y and 5y swaps; they were also very small sellers of mortgages. Central banks were more active, again buying 2s and 3s while stepping up their purchases of mortgages. Asian lifers were better to sell long end, primarily cash 30s today, while fast money and macro accounts were better sellers of TYM and cash 10s after Tokyo lunch. In Europe, Treasuries saw a better bid by RV accounts in TY against selling RX contracts, in US 2s against schatz, and in US 5s outright. The move in EUR after the disappointing ZEW number was largely ignored by bunds, but did see some macro buying of Treasuries outright. When 3ml missed badly, Treasury curve responded in a steepening move.
Since NY has walked in, there have been numerous stories about FRB plan to reinstate Commercial Paper Funding Facility last used during the Great Financial Crisis. But until we see something that the market approves, any bid to risk will be a very tenuous affair at best. Fed will conduct 6 buyback operations again today, staggered between 10:15 AM ET and 2:15 PM; while keeping the total at $40BN, they have rebalanced the buckets to add less liquidity in the front end and more in the troublesome belly today. Data is a nonevent again, with tape watching the usual theme.
As we wrap this up, stocks are taking another leg lower shortly after the US open. Clearly the Fed’s effort to provide monetary support has awakened the demons and made a problem where there actually might not have been one. Now you need EXTRA monetary stimulus (a legit CP facility, and a CDS facility as we haven’t even talked about that dog yet). On top of that, you need to FORCE banks to use the window, which needs more than having the big guys do a small chunk and then tell everyone to look at them as we did this AM. Let’s get back to the market. Any move that gets 10s back to 90/92 bps, or 30s back to 1.44/46%, is a buy in 10s. Don’t want to touch belly or long end, only dabble in 2s and 10s as everything else has some fleas. For choice today in TYM, call the range at 137-27 to 136-23+, after an overnight range of 138-02+ to 136-29. We should find some footing for risk later this morning as would assume some CDS/CP/GC help comes along, with Treasuries bid into the buybacks and free to fall if risk rallies later in the day. As for support in TYM, watch 136-30+, the 136-23+ level, 136-13+, 136-00, 135-23, 135-14; resistance comes in at 137-20, the aforementioned 137-27+, 138-04, 138-14, 138-26, 139-00, 139-03+.
Good luck, have a good St Paddy’s Day, and let’s hope we get a good end to Balloon Tuesday,
mjc