bearish dealer pieces out, no volume but risk winning the day….so far (Monday)

Yawner start to the week in keeping with the July theme, as markets trade eerily quiet, bell-weather TY contract only breaking through 200K contracts for the session after 8 AM ET. Thank goodness CME launched a new 3y note future overnight (yeah, the one they delisted several years ago)! Markets trade better to risk thus far today, another impressive performance in Asian equities and some bearish technicals for global fixed income, at least for now. Dealer pieces out bearish on TY contracts, bearish on 20y cash, and looking for funding to blow out…oh boy. As of 9 AM ET, Treasuries are 1-2.5 bps higher in yield as curve bear steepens slightly while US equity index futures trade just shy of 1% better ahead of the cash open.

Risk opened mixed until all of Asia arrived, at which time it found solid footing. Treasuries saw some early supportive Asian central bank buying of 2s and 3s, along with some minor levered short covering after a lack of follow-through post Friday’s late pressure. Japanese real money lifted some 10s and US classics before Tokyo lunch, but after lunch it was all selling as Treasuries traded back to their Friday settlements in a steepener. Asian real money paid in USD 30y swaps, while Asian bank was better seller of cash 10s outright and paid in USD 5y swaps. Once US rates returned to unchanged, we traded sideways through the European open. There was small deal-related selling in US 5s after the European open along with a buyer of 5K TYU 137 puts (6/64) that given the lack of participation took Treasuries through unchanged. There again was interest in receiving in belly of 10s12s15s fly on the swap curve; this has been a thematic trade for the last week. Would love any insight. Central bank buying of 10s and some mortgages took place a bit later than normal and in smaller size today. Volume really dried up in Treasuries, as they largely followed bunds and gilts for the session, with European fixed income under pressure given a larger sovereign and corporate calendar this week. After NY arrived, selling picked up with hedge fund selling of US contracts, macro adding 5s30s steepeners, and some levered selling as we reauctioned last week’s 30y (through the stop out level of 1.33% last Thursday). 10s were just reauctioned (.653% last Wednesday for stop out), as macro has set their sites on that as well.

Asian session saw small pressure on domestic rates, with JGBs .5 bps higher in yield, Aussie 10s 4 bps higher and Kiwi 10y yields .25 bps higher. The JGB curve steepened as attention turned to BOJ rate policy and early set up for 40y suppply, while even though Aussie 2025 syndication is supposed to be heavily oversubscribed there was aggressive concession building for the supply. NIKKEI (+2.2%) and Shenzhen (+3.5%) led Asian stocks higher after a good day in the US on Friday as equity risk seemingly knows no detractors.

Europe was about concession building and dealing with some long-dated hedging. Supply from Italy, France, Germany, and Spain this week, along with ECB meeting on Thursday have set the tone. There was good selling in bunds and buxls by dealers and macro accounts early in the session, while EUR long-dated swaps lead a bear steepening move. There has been portfolio paying in EUR 30y swaps outright, and some EUR 30y50y flatteners that have gone through as well. German 10s are 5.5 bps higher in yield, with peripherals tightening .75 to 1.25 bps to core, while UK gilts are 4.5 bps higher in yield, largely following the move in bunds.

This market is so frustrating: the pullback we were looking for at the end of last week didn’t begin until the bitter end of Friday’s session, then looked dormant all night, but finally seems to have re-awoken since US arrived. You should back up at least another 4 bps here to test more important yield levels now that you are finally reauctioning last week’s supply. Will be interesting to see who shows up to buy against better levels.

Overnight, dealer piece was out with a trade recommendation looking for FRA/OIS to widen. They like the EDZ0 95/96 put spread, paying 1.5 bps or just selling the 95 put outright at 1.5 bps as they believe it’s clear Fed won’t allow FRA/OIS to widen beyond 50. If one agreed with that thinking, why not do the put spread ratio and get in the trade for flat? Just thinking. Overnight the put spread traded at 1.5 bps 6500 times.

All right, for choice today in TYU, let’s call the range at 139-04+ to 138-23, after an overnight range of 139-10 to 139-03. Resistance comes in at an aggressive 139-04+ after levels above there were rejected overnight; trade through and you will be at 139-09+ in a heartbeat, then 139-13, 139-19, 139-25, 140-04. Support comes in at 138-28, but given the financial supply we should see this week after bank earnings that begin tomorrow, think we see some rate locking in an illiquid market that takes us to that 138-23 for the real test; below there watch 138-19, 138-10, 138-01.

Today’s calendar is barren, with only Monthly Budget Statement released at 2 PM ET, while we can wait on comments from Williams (talking about libor) at 11:30 AM ET and Kaplan (National Press Club webinar) at 1 PM ET. That’s about it folks. Earnings start tomorrow morning and tax day on Weds, so at least we have that to look forward to.

Have a great day,