big risk-on bid to start the week, but cracks are already emerging….(Monday)

Risk on globally, with sentiment buoyed by better forward-looking data in China (even if GDP missed badly), hopes for a stimulus bill by tomorrow (as Pelosi throws down gauntlet and calls tomorrow last day), and hopes for resolution on BREXIT (which will involve Parliament watering down PM Johnson’s “Internal Markets” Bill). Did you say House of Cards, but I digress. As of 8:45 AM ET, Treasuries are .5 bps to 2 bps higher in a bear steepener, while US equity index futures are almost 1% better but well off their best levels ahead of the cash open.

Volume was good in the Asian session for both equity index futures and Treasuries; for once, the volume and flows remained decent during European morning as well. There was Japanese real money selling of US 7s and 10s, a common theme over the last week now; CTAs sold US classic and TY contracts through the lows of Friday, with futures leading the move lower for rates. Pressure on Aussie rates and JGBs helped keep the pressure on USD rates. Asian real money was a buyer of US 30s, but Japanese asset manager was a willing seller, while Asian bank paid in USD 5y and 7y swaps in an otherwise uneventful day for swap market. That makes sense ahead of the CME auction today for the libor to SOFR transition.

Into the London open, there was central bank buying of mortgages, along with small buying in US 30s, which underperformed on the curve; today they skipped doing anything in WN futures. The London open saw a second round of positive risk sentiment, better macro account selling of US 10s and paying in USD 5y swaps. There was deal-related paying in USD 30y swaps along with interest in front end steepeners: 3s30s and 5s10s. NY arrival saw bank selling of 10s and 20s in cash, but better interest to lift paper in 2s. There were 10K TYZ 138 puts lifted for 38/64s just as NY arrived, but otherwise a quiet session for options thus far.

JGBs were under steepening pressure throughout the Asian session, with concessions built for tomorrow’s auction of JGB 20y paper, while Aussie 10s saw domestic real money and hedge fund sales ahead of RBA minutes tomorrow. JGBs were flat in 10y, but 1 bps higher in yield out to 40y, while Aussie 10s sold off 2.5 bps and dragged New Zealand 10s 1 bp higher in yield. Chinese equity indices were mixed to slightly lower, while rest of Asia rallied between .75% and 1.2% (NIKKEI).

European rates were under pressure after it looks like there is finally some work being done to solve the BREXIT crisis. A move to water down Johnson’s “Internal Markets” bill, along with details of weekend conversations and formal meetings for later today helped risk sentiment early. Rising COVID-19 issues and Moody’s downgrade of UK debt and BoE is but a memory from Friday afternoon as Europe focuses on resolution of BREXIT. Bunds have actually seen slightly better real money buying in 10y sector both outright and against Spain and Italy, as those two lead peripherals 4-5 bps wider. Dealers were early sellers of bobls and buxl ahead of supply this week, while paying in EUR 10y and 30y swaps was deal-related flow. Gilts have held up better, with enough noise there to keep FTSE in check all day after an early risk bid. DAX and FTSE have done a good job fading the positive sentiment they had to begin the day; certainly bears watching to see if NASDAQ suffers a similar fate in the US today. Belgium issued 10y and 17y bonds to good bidding and decent demand. Peripheral equity indices are holding to better levels, but FTSE and DAX have turned red in the last hour.

The only data release today in the US will be NAHB at 10 AM ET. There is no coupon supply until Wednesday’s 20y auction and Thursday’s 5y TIP auction. However, Powell is currently speaking on an IMF panel (nothing policy or economic update related yet), Williams speaks at 9 AM ET, Clarida at 11:45, Kashkari at noon ET, Bostic at 2:20 PM ET, and Harker at 3 PM. Actually the biggest event in the rates market today will be CME’s auction process for the conversion of cleared swaps from Libor to SOFR. Friday’s LCH auction went very smoothly, although that was not unexpected. Today’s CME is the wildcard: as long as it goes smoothly, no worries, but if it comes off the rails, then things could get a bit more dicey.

Have this bad feeling that the range for today has already been largely established. The lows of the session held pretty well at fairly important support levels in 5y, 7y, and 10y sectors. Bonds have room to go further to reach similar objectives but with interest in other places, that may work for now. There is a lot of hope baked into today’s risk on sentiment, more hope than reality maybe. And you eliminated much of the NASDAQ short (NQA futures), flipping to long via the option expiry on Friday, while VIX shorts are growing and US classic shorts remain at heady levels. Something to think about as this week moves along. For choice today in TYZ futures, let’s call the range at 139-02+ to 138-23+, after a range thus far of 139-01+ to 138-24. Maybe a final gasp higher in equities on the open and then grind them lower along with yields the rest of the day. Support in TYZ comes in at 138-25+, the 138-23+ level, 138-18+, 138-15+, 138-13, 138-09+. Resistance comes in at 138-30+, 139-01+/02+, 139-05, 139-11, 139-15.

Have a great start to the week,