Markets trade risk averse this Thursday morning after BoE threw cold water on the negative rates idea, Europe saw some bad earnings releases, and US still can’t resolves issues over next stimulus bill. As of 8:35 AM ET after the claims data, Treasuries trade .5 to 2.5 bps lower in a bull flattener (what else is new), while US equity index futures are have retraced their overnight weakness ahead of the cash open.
After Treasuries opened mixed in Asia, JPY started to strengthen and by 9 PM ET, Treasuries went bid in tandem. There was Japanese real money buying in 10s, Lifer buying of WN (they love that product right now) followed by two block purchases in TYU: 3350 lifted for 140-02+ at 9:19 PM ET and 3400 lifted for 140-03 at 9:38 PM ET, a total of $600K in DV01 for the 7y sector. There was small paying in USD 30y swaps very early in the Asian session and then again just before BoE announcement, but swaps were generally very quiet throughout the night. Central banks bought small in WN and cash 10s, even smaller in mortgages while skipping other spread product.
GBP made a power move higher when BoE threw cold water on the idea of negative rates that market had been pricing rather aggressively later this year (“negative rates likely less effective at this time”). The MPC statement, released 5 hours earlier than normal, helped bid dollar in sympathy on the belief this lessens pressure on Fed as well. A general risk off theme in Europe after the open, with some disappointing earnings (they actually trade off earnings in Europe, cuz I don’t think we do here!) and deal-related buying in long end of bund curve have cause bull flattening bid in bunds and Treasuries, lifting long end gilts higher in sympathy amid a growing belief the last few hours that the BoE was simply delaying the inevitable this morning.
Volume has not been anything to write home about, as per usual these days, but the bid for fixed income in Europe and the US is painfully evident, especially as JPY crawls back toward its highs of the night. Back to 105.40 right now, through the 105.35/40 zone could squeeze some JPY shorts and if we move expect buying of US long end by Japanese accounts tonight again, possibly front run by fast money before that. JGBs traded under modest pressure as there may be fewer funds available to buy domestic FI if it’s all going after unhedged USD products with move in yen. JGBs closed the session lower, with 10y yields up .5 bps, while Aussie yields were 1.5 bps higher and Kiwi yields were .25 bps higher. Asian bourses were mixed, with majors slightly lower and smaller commodity-based economies slightly higher.
Today’s data is already done, with claims not really impacting the market other than to relieve some pressure on equity indices, as all eyes and consideration are squarely on tomorrow’s NFP report (and then next week’s Treasury refunding, but everyone is trying to ignore that detail for now). We will get a virtual appearance by Kaplan at 10 AM ET to speak on the economy as well.
You are stubbornly holding above this 105.40 level in JPY, and crazy as it seems I think that is all that matters today in an illiquid market that waits on tomorrow’s NFP report. For choice today in TYU, call the range at 140-18 to 140-03 after an overnight range of 140-10 to 140-00, with early risk of test for lower bound. Hold there and think some aggressive short covering/front running of JPY trade could take us up to the 140-17+/18 level later today. Support comes in at 140-05+, the 140-03 objective, 140-00, 139-28, 139-26/24+, 139-19+, 139-11+; resistance comes in at 140-10+, the 140-17+/18 level/objective, 140-21, 140-24+, 140-30, 141-04.
Have a good Thursday and get ready for tomorrow (he prays yet again!),
mjc