With that headline at 6:50 PM ET last night, the tone for today was set, as US equity futures tumbled and the dollar spiked (only two markets trading at the time), with risk off becoming today’s main theme. A busier data day (finally!) threatens to have its thunder stolen by the escalating trade tensions between the US and rest of the world. As of 8 AM ET, Treasuries are .75 to 1 bps lower in a bull flattener, while equity futures are down .5% ahead of the cash open.
When Treasury futures opened 10 minutes after the news broke, you immediately cheapened every sector by 1-1.5 bps across the curve. Flows were heavy, with TYU trading over 2x its average volume, but much of it was early CTA buying/stop outs in FVU, TYU, and USU futures. Interesting to note here that throughout the night, especially after the Tokyo lunch, Japanese real money accounts were better axed to sell the belly, continuing to focus on 5y sector but adding some TYU today. Central bank was also a seller of 7s, while RV was initially forced to cover in 10s but then reshorted after Tokyo lunch across the curve. Asian real money bought new 3s and also a few slugs of US 30s. As for the rest of Asia, the risk off caused JGBs to more than erase yesterday’s minor losses, with long end again seeing support from lifers and 10y sector seeing domestic real money purchases. Australian funding issues eased, allowing the curve there to bull steepen on the risk off trade, with Aussie 10s 2 bps better but 3y at 4 bps lower in yield; there was good domestic bank buying in 3y sector along with some receiving in Aussie 10s against US 10s in cross currency swap trade. EM currencies were under pressure from the outset, generating an underlying bid for JGBs, Aussie, and US rates. Asian stocks closed between .75 and 1.5% lower, led down of course by Chinese bourses.
Early trade in Europe similarly saw a repricing of risk there but in relative orderly fashion, helped by need for concessions ahead of today’s growing official supply calendar on the Continent. Dealers were early sellers of bunds ahead of auction there, with Portugal supply also bringing out some hedge selling of bunds. Early flows aside from the hedging saw central bank buying of both German and UK front ends in smaller size, RV buying of schatz outright and against bunds, a block buyer of 5600 Schatz to pay in EU 2y swaps (at 5:33 AM ET), UK macro account buying of TY and cash 5s. There was no data of import in Europe today, so focus remained on what was a decent German bund auction, along with Portugal supply that saw softer bidding but decent prices for 10y and 16y supply. After the supply was out of the way, bunds led gilts and Treasuries higher. A US buyer of cash 10s just as NY walked in made it more attractive for RV account to then sell $850K of DV01 in TYU futures (11,375 at a price of 120-06+, 6:54 AM ET) against the euro equivalent purchase of bunds, that took Treasuries back to their opening levels from last night; since then Treasuries have crawled back into middle of the overnight range on light short covering.
Today’s calendar gets a little busier, with PPI at 8:30 AM ET, wholesale trade at 10 AM, but the big event of the day remains the $22BN in reopened 10y notes at 1 PM ET. Williams will speak in Brooklyn at 4:30 PM ET to local community leaders. It’s not a big calendar, but it’s at least better than the last few days….
Well, after the quiet and tame pullback for US rates the first two days of the week, we seem to have encountered a bump in the road. Or one might ask if somebody is short stocks and trying to drive them lower with all these tariff tantrums…but I digress. So, we corrected aggressively overnight, although calmer heads seem to be gaining the upper hand, especially since this action was threatened earlier last month and the President had requested a list of “up to $200BN in goods for additional tariffs” some three weeks ago; maybe this is just that list. Think this may be a very small correction within the correction; if that is correct, we have to trade down to 119-29 today in TYU for confirmation that we could actually get a 3% yield in cash 10s before the larger bear correction is over later this month. So, for choice today, will call the range in TYU at 119-29 up to 120-11 (for the rest of the day, early high was 120-13 during the Asian session). Obviously risk is to tak out 120-11, and then it could get ugly as we will quickly trade up to 120-15+ and open the possibility of 120-20, 120-26, and 121-02. On the downside, it would help to take out this 120-06 level, at which time 119-29 will look very reachable with the 10y reopening on the docket. Below there, support comes in at 119-22+/21+, 119-19 (yes crowded zone), and 119-13+.
Good luck out there today….
mjc