Markets are much quieter again today, still recouping from the pain of earlier this week. Today’s theme is massive debt issuance in Europe and the US along with setting up for tomorrow’s NFP report, although that is likely to be far less an event given the ride we’ve endured thus far this week. As of 8 AM ET, Treasury yields are .75 to 1.5 bps lower in a flattener, while US equity index futures trade marginally firmer ahead of the cash open.
Treasuries were fairly well supported during the Asian session, albeit on far lighter volume than yesterday. Asset manager buying in 10s and 30s started shortly after the Tokyo open and continued right into the London session. A buyer of the FVH 118.25/119.25 risk reversal for flat to buy the put on a block (15K at 8:51 PM ET) saw seller dumping FVH0 to hedge up (client did the trade without delta), causing belly to underperform. Decent JGB 30y after good concession had been built resulted in JGBs bouncing back toward unchanged, but better deal-related domestic paying in JGB 30y swaps kept JGBs from turning positive in the Tokyo afternoon. JGB yields ended +.5 bps, with Australia up 4 bps on repricing after the US sell-off in rates and some deal-related selling of Aussie 10s, as New Zealand rates were 1 bps higher in yield. Equities in Asia retraced most of the losses from Wednesday’s session, with most bourses up between 1% and 1.75%, but with NIKKEI better by 2.3%.
Treasuries were dragged lower into the European open by aggressive selling in bunds from the outset. There is another EUR33 BN in issuance slated to price today in Europe, with some late-day drive-by launches yesterday from EIB and World Bank. Bunds were down over half a point on their reopen, pulling Treasuries lower. A story that a senior Iranian military official said there was more retribution to come caused a short-lived spike in European and US rates, but that was quickly leveraged by a block seller of 16,408 TYH for 128-23 at 3:52 AM ET, with client dumping a quick $1.35MM of DV01 in the 7y sector. Interesting that just before that time, a client also blocked EUR 500K of bund/buxl flattener (3:45 AM ET), as RV accounts were looking to buy buxl against bunds and US classic contracts, given the outperformance of the US long end. Better real money interest to buy US 7s outright and better RV interest to buy 10s against 30s ahead of 30y reopen this afternoon. Spain issued 2s, 5s, 15s and inflation-linked 14s to decent demand, best interest in the 15y sector, while UK 10y linker saw decent bidding, especially after the Carney comments that BoE had plenty more room to accommodate any slowdown this year. EUR issuance looks to be EUR 33BN today, after 35BN yesterday and 27BN on Tuesday. Into the US open, there was better deal-related receiving in USD 5y swaps and 7y swaps, while RV account used the better levels to add some shorts in WI 30. European risk follows the lead from yesterday, with equities trading marginally firmer.
Today’s economic calendar is pretty barren, just claims at 8:30 AM ET and Bloomberg Consumer sentiment at 9:45. However, we do get a decent slate of Fed speakers: Clarida spoke at 8 AM ET, while Kashkari speaks at 9:30, Williams speaks at 11:30, Barkin at 12:45 PM ET, Evans at 1:20, and Bullard at 2 PM ET. Lastly, we will wrap up Treasury’s first refunding week with $16BN in reopened 30s at 1 PM ET.
Okay, stuck in this range defined by 1.70% and 1.94% in cash 10s. 20 bps is a lot in our brave new world, but we’ve actually done the round trip in just the first five trading days of the year. Time for a break out, with the market currently slightly leaning toward a break to higher yields, but need one more effort to squeeze some shorts. Specifically, we had a trade during the crisis Tuesday night that left us levels that were never retested, as we stopped right at intra-day resistance yesterday (129-10, high on the bounce was 129-11); that should auger for a test of the overnight high at 130-06 if we can get above 129-17, but a failure between 129-10 and -17 should be a productive sale. It’s a fluid trade, but could be productive and needs to be watched. Maybe the way to play this is conditionally, buying a covered call on TYG later today after they take out a bit more of the fear premium from Tuesday night. Keep an eye on it, and see if it cheapens up. As for choice today in TYH, call the range at 129-02+ to 128-19+. Seems a bit weird, but there are three different signals coming up with a hold against this 128-19+ level. We’ll see. Support below 128-19+ comes in at 128-14, 128-08+/09, 128-01+, 127-25; resistance come in at 128-30, the aforementioned 129-02+, 129-10, 129-17+, 129-23, 129-26, 130-00+, 130-06.
Have a great Thursday…
mjc