It has been a choppy night, early risk on flow, but then a sense of caution after funding issues remain in Australia, traders await expected RRR cut from PBoC, Italy picks a Euroskeptic for key post, and BoE gets a bit more hawkish. Volumes are nothing to write home about, but better than the last few days. As of 8 AM ET, Treasuries are flat to .5 bps lower in yield out to 30y sector, while US equity futures are mixed.

Risk on was the early theme in Asia, with better hedge fund selling of US 10s and central bank selling in US 2s; however, some early month end/quarter end receiving in USD 10y swaps by Japanese real money kept Treasuries above key support levels. After Tokyo lunch, bid to US equity futures emerged while Japan (5y) and Australia (2037 issuance) choked on sloppy supply events; Treasuries traded to their lows on back of better Asian bank paying in 10s and selling of 5s and Asian real money selling of 10s while RV account was adding 5/10s flatteners ahead of next week’s supply. Soft JGB 5y auction resulted in minor losses for JGBs, but Aussie 2037 issuance went poorly, adding to the angst Down Under as yields there backed up 7 bps in 10y sector on the session. Once again, Aussie bank bills backed up, this time another 2.58 bps, being blamed on quarter end, dealer balance sheets, the usual suspects; however, that pressure is making its way out the curve meaningfully now. Meanwhile, Chinese rates went the opposite way, dropping 4-7 bps on expectation that PBoC will cut RRR to add liquidity. NIKKEI managed to close up marginally (.5%) but rest of Asia that closed after the European open ended the session in the red, down anywhere from 1% to 2.5%.

After fixed income opened softer in Europe, it didn’t take real long for risk off to take hold. While CTAs sold the open in bunds, hedge funds sold more US 10s, and macro account sold bunds and gilts, European equities couldn’t hold an early gain and turned south. There was also a block buyer of 5000 TYU for 119-17+ at 2:40 AM ET, a lift of $350K in DV01. Fixed income stayed under mild pressure ahead of decent supply across multiple tenors in France and Spain. Bunds and bobls were sold early by dealers to hedge the supply, but into the auctions they turned their fire on the sectors to be issued. However, when DAX rolled over, better European real money buying emerged in buxl, some deal-related buying came through in bobls, SPGBs broke 2 bps shortly before the auction, seemingly taking BTPs along; shortly thereafter we learned that it was BTPs as the driver after Euroskeptic Alberto Bagnai was named Italian Senate Finance Committee Head. Mr. Bagnai has some rather strong negative views of austerity, Angela Merkel, and the Euro currency. BTP 10y yields are up 12 bps on the session, with SPGB 10s up 6 bps. The French supply was mixed: sloppy long dates and linkers, better bidding in front ends, while Spanish supply was a sloppy affair, albeit hurt by the affairs in Italy just before the auctions. Almost lost in the fun here was the BoE’s “as expected” decision not to hike; the surprise was Haldane switching to hike, leaving the vote at a hawkish 6-3 this meeting. The Committee acknowledged recent weakness but saw it as transitory and said it was watching European issues and trade negotiations; end of the day, gilts sold off 1/2 point and short sterling rates were up 3-3.5 bps (5 on the day) after the announcement. Treasuries broke back to unchanged on the BoE announcement, with volume grinding to a halt.

So yesterday got our back up in Treasuries, even a couple bps more than we hoped, and we got some steepening that caught a few people off guard. Would think we can get more of same over the next few days, which will add to market’s confusion as majority will look for flattening ahead of supply and quarter end, but that can come end of next week. For choice today, call the range in TYU at 119-14+ to 119-27+. Expecting pressure early and then let’s see what happens. If you take out 119-14+, you open the way to 119-06 and then 118-29+ ahead of 118-26. Taking out 119-27+ will open the way to 120-01 and then our key 120-08 level. For now, still be nimble playing from the short side, looking to get a great buying opportunity against 3% in cash 10s.

Today’s calendar includes claims and Philly Fed at 8:30 AM ET, followed by HPI at 9 AM, and LEI at 10 AM….wake me up when it’s done. Treasury will reopen $5BN in 30y TIPs at 1 PM ET. Kashkari will speak in MN at 9 AM and then at the end of the day we’ll have the always entertaining 2018 Bank Stress Test results released by the Fed.

All right, back to the salt mines, and have a good day!

mjc