Wowser, it is shaping up to be another very painful day…at 6:30 AM ET, way too early to arrive for this boring market, only 108K TY contracts had traded. That is like Boxing Day type size and speaks to the absolute illiquidity and lack of participation in the market. But enough ranting. Markets are mixed this morning, lacking direction, with US Treasuries flat to 1 bps lower led by intermediates, while US equity index futures are mixed (NASDAQ up, DOW down, S&P flat, what else is freaking new???) ahead of the cash open.
There are a couple things to highlight, and it’s all Asia/US related (sorry Europe):
*MOF data out of Japan last night confirmed suspicions. After massive buying out of Japanese (and Asian, but this is just yen) accounts in the first three weeks of June, the faucet was shuttered for the end of June, as foreign holdings of bonds by Japanese entities dropped $5BN in the week ended 3 July. Makes sense. And remember that as quiet as it has been this week, we had seen better Japanese real money selling of belly and intermediates the first three sessions of this week. Oh, that stopped last night. They didn’t buy much, but they did flip from sellers to buyers. Real money out of Japan lifted 7s, 10s, 30s, and some mortgages, while Japanese lifers stepped in to buy WN ultras (the whole pure duration play of the WNU future everyone talks about). Of course, Asian central banks were buyers, albeit very small this day, of intermediates and mortgages like usual. Plus Asian lifers were seen lifting some WN as well (ok, total volume in WNU is 10K contracts overnight, so don’t get TOO carried away with this “buying” of WN, but it is thematically relevant). Amidst all this “buyside” interest, obviously they weren’t that aggressive as markets are basically flat within a whopping 2 bps range overnight.
*There was some selling in the market overnight, with Asian real money accounts selling 2s, 3, 5s, and TY contracts ahead of the London open, RV accounts selling WI 30s outright and against 5s ahead of today’s auction, while US-based money manager sold 10s on the cash open in Tokyo. Asian bank paid in USD 5y after Tokyo lunch and there was more receiving in the belly of that USD 10y/12y/15y swap butterfly. But after Treasuries went bid (if .25 bps is considered “bid”) after the European open, sell flows got very quiet.
*Here is something important. JGB 5y auction was upsized from JPY 1.9TRN last month to JPY 2.5TRN today. IT WENT GREAT. .1 bps tail, strong bid to cover of 4.25, and JGBs ripped higher, actually led by long end still basking in a strong 30y auction earlier this week. The carry trade begun this week is alive and well in JGBs, with 20y and 30y JGBs rallying another 2-2.5 bps overnight, while 5s managed to improve by .5 bps and 10s by 1 bp. A dour BOJ assessment for all 9 regions of the country got barely any notice, then again neither did a 1.7% m/m jump in core machine orders (expected -5%, oops). A small beat in China CPI for June (-.1% vs expected -.5% with annualized beating at +2.5%) helped underpin Asian equities, as most bourses held their early US-inspired gains.
*The decision one must make into the US 30y today is whether money is flowing across the board from yields out of Japan, or whether it stops at US 10s. They clearly showed up yesterday for 10s, Tuesday for 3s, and all week for JGB paper. Will they break and stand down for the 30y??? Bet against it at your own risk, and remember that even a sloppy 30y only makes it more appetizing if LDI accounts are really back on the prowl for yield (i.e., WN ultras and mortgages).
The theme since NY arrived has been selling some vol in 1m to 3m expiries, while covering now cheap gamma inside of 1m. Why not??? How could it not work, Mr. 125K TY Contracts??? Uff, all these signals of a pullback in the rates market are really starting to go away right now. What seemed so obvious a week ago is quickly turning to mush. There is actually one indicator giving off a range of 139-09 to 139-01 in TYU for today! If that happens, it’s really time for a new hobby here. For giggles and again with less than zero conviction, let’s call the range in TYU today at 139-12+ to 139-01 after an overnight range of 139-07 to 139-02. It will be harrowing to hang on against a test of 139-12/12+ and maybe we need a failure against the extreme to make this bear move work. But its late and I really feel like it’s getting near give up time. Resistance in TYU comes in at 139-09, the 139-12/12+ objective, 139-16, 139-25, 140-04. Support comes in at 139-01, 138-28, the important 138-23 level, 138-19, 138-10, 138-01.
Today’s economic calendar continues the week of boredom with claims at 8:30 AM ET, followed by wholesale inventories at 10 AM. Bostic talks AGAIN today, with a webinar on fiscal policy at 12:00 PM ET. At least we have the 30y reopening to talk about, with $19BN reopened 30y to be auctioned by Treasury at 1 PM ET. THEN you can go back to whatever it is you do to pass the time this week….
I have to go now. Try to have a fun day and stay positive sunshine!