***HOUSEKEEPING NOTE: IF YOUR SCREENS DON’T SWITCH AUTOMATICALLY, SWITCH TREASURIES TO DECEMBER ’18, AS THAT IS LEAD CONTRACT FOR FUTURES AS OF TODAY***

Global markets are continuing with their theme for the new week and month, after the US holiday on Monday, with minor risk-on bent across most of the globe. US is slow to fully join in, and global activity has been light thus far, so let’s see what the return of US desks brings us. As of 8:15 AM ET, Treasuries are .5 to 1.5 bps higher in yield from 3 PM marks on Friday in a bear steepener, with US equity indices small lower.

Treasuries began the Asian session last night under mild pressure, in similar fashion to Monday’s trade for Treasury futures, which of course were open Sunday night even though cash was closed. Early flows today saw better central bank buying of 2s and 3s, Asian real money buying of 5s to sell 30s, and a credit desk paying in USD 30y swaps. After Tokyo lunch, better hedge fund interest materialized to receive in 2s5s on the USD swap curve, while macro account added 5s30s flatteners. Volumes were fair at best. Locally, JGBs bounced slightly after coming under pressure Monday; ironically, the same BoJ buyback story caused both moves, as Monday saw pressure from the BoJ cutting the number of buybacks, but Tuesday’s bounce came from the increased size that BoJ will conduct at the fewer events. So there you go. Aussie rates sold off slightly in a flattener after the RBA announced no change to policy as expected but left open the view of the more hawkish camp that improving conditions will soon result in rate hikes. Asian stocks have traded mixed through the first two sessions of the week, with NIKKEI slightly lower last night and now for the week, but rest of Asia holding up better.

The European open last night saw hedge fund selling of bund contracts, followed by CTA stop-outs in bunds and buxl; this led Treasuries through Monday’s lows (futures only remember) as CTA selling was seen in FVZ and long end of the US curve repriced in sympathy with move in Europe. Italy’s continued outperformance on this as-of-yet unseen and unvetted Salvino plan added to pressure on core bonds, with banks selling bunds and 10s on the peripheral tightening; Italian bank stocks up 3-6% are adding to the risk mentality and further pressuring yields, while BTP 10s trade 8.5 bps tighter to bunds, led by futures though in an important indicator of what is really going on (short covering driven by a weak story). On Monday, a 10K-lot block buy of TYZ for 120-06+ at 4:15 AM ET ($760K of DV01) brought Treasuries back to unchanged, but no such buyers showed up Tuesday morning to save the day. Gilts have seen a better RV bid against bunds throughout the session, along with some residual real money buying from yesterday. Softer PMI’s, especially highlighted in the UK, have also helped to underpin gilts. As New York walked in, bank buyer of belly in Treasuries left long end trailing the pack that much more as bear steepening, albeit minor bear part, seems an early theme for this last month of the 3rd quarter.

Today’s calendar includes US Markit manufacturing PMI at 9:45 AM ET, followed by construction spending and ISM at 10 AM, while August vehicle sales will be released throughout the day. No events or appearances on the calendar after Evans speech was cancelled due to weather, but there is a lot of front end supply for cash management with 4-week, 3-month, and 6-month bills all on the docket in this post-holiday session.

Markets will chop around for the early part of this week, with focus squarely on Friday’s NFP report ahead of a busy month for central banks and countries that need to find some cash (yes, Salvino scam plan won’t fool everyone for much longer). But for today, risk is that this continues and pressure Treasuries. For choice today, call the range in TYZ at 120-08+ to 119-30, acknowledging that we printed 120-09+ early today. Risk is to take out 119-30 early and head for mild objective at 119-27, with further support at 119-24+, 119-19+, 119-12+. If risk stubs its toe on any of these PMI reports and TYZ takes out 120-08+, it opens the way for a trade to 120-12+, then 120-15, 120-17, 120-24+. Keep some gamma on, but don’t need to add anything right now as we should be able to get more at these prices or cheaper closer to, if not after, the NFP report.

Have a great start to the week…..

mjc