day we have been waiting for is upon on, now what to do with it….(Wednesday)

Markets are biding their time ahead of a busy day that kicked off with ADP a few minutes ago (nonevent) and brings us Treasury Refunding Announcement along with FOMC announcement at 2 PM ET. The well-advertised real money unhedged buying of foreign bonds was the story in Asia last night, with noise in Europe keeping us contained for the last few hours. As of 8:20 AM ET, Treasuries are .75 to 2 bps lower in yield, in a bull flattener, while US equity index futures are either side of flat in a very quiet session ahead of the cash open.

From the outset in Asia, there was a better bid to long end as 30y sector of US curve traded over 1.5 times average while inside 10y was roughly 70% of average volume. The well-advertised announcements over the last few days by more Japanese insurers that they intend to increase foreign bond purchases unhedged saw fast money buying US classic futures even before cash opened in Tokyo; Asian real money was a better buyer of 30s (not the insurers), while RV accounts used the better bid to bonds to enter into pay USD 30y swaps outright and on the curve against receiving in USD 5y swaps. Japanese and central banks again bought USD spread product, but in only social sizes overnight. US real money and Asian real money accounts were better sellers of the belly of the UST curve through Tokyo lunch, the latter in some cases moving in on the curve. Despite stronger than expected retail sales in Japan (+9.1% m/m vs 6.9% expected), JGBs traded better after good results on the last buyback ahead of the BoJ meeting, while Aussie 10s reversed a portion of yesterday’s sell off on tame (in line to better) inflation data, rallying 4.5 bps on the day and dragging Kiwi rates 2 bps lower in yield; interesting to note that yesterday saw a large jump in open interest in Aussie 3s and 10s. Asian equities traded soggy, closing marginally lower across most bourses.

The European session was about waiting on the US and getting some sovereign paper priced. Italy reopened two 5y issues and a single 10y issue, meeting with decent demand but very soft bidding, while German bobl (5y) auction was mediocre at best. German regional inflation data was in-line to a touch higher than expected, but exerted only short-lived pressure on bunds. Better buying of puts by real money and hedge funds in bund and schatz sectors. Macro account was better seller of US classic futures and cash 10s shortly after the European open; RV account bought US 5s to sell bobls ahead of bund supply; and bank was seen buying USD 30y spreads believed to be deal related. Election set for Dec 12 in UK, little reaction in market. Some domestic bank selling of BTPs before the supply, real money selling of the same after the supply. Italy is 3 bps wider to bunds while rest of peripherals are in line. European equities are mixed, largely hovering around flat for most of the trading day thus far, awaiting direction from US.

Today’s calendar kicked off with ADP, followed by first look at Q3 GDP and Refunding announcement at 8:30 AM ET. Then it will be wait and stew for the FOMC announcement at 2 PM ET, press conference at 2:30.

Refunding is expected to keep sizes of the 3s, 10s, and 30s the same as last quarter ($38BN, 27BN, and 19BN respectively), but it’s what the Treasury says about 20y issuance that will get the most attention. I think this is overblown, but you never know. As for FOMC, Fed will cut 25 bps and given the chatter out of other CBs, it sure seems like everyone has the same game plan: the Fed then should say they are pausing to assess. Guessing the market doesn’t take that well at first, but a good dip will be worth the purchase. Think you want to be long by the end of this week. The key levels to watch in TYZ today are 128-21+ (1.91% equivalent in 10s) and 130-13+. Each one will result in a quick 5 bps extension, which should be a fade on the first trade. For choice today in TYZ, calling the range at 129-24+ to 128-29. Watch 2.38% in cash 30s, but nothing the other way until 2.10%. Don’t like buying anything conditionally, as vol should get slaughtered this afternoon (i.e., Fed goes to neutral after cutting 25 bps), and Friday should not change that. Would be willing to sell some vol with your money but it is never a good idea to sell something that is this cheap, unless it is to hedge. Just tough slogging here in the Chicago snow….

Have a good and productive day,