didn’t see that one coming, as trade policy sends risk reeling this Friday….


Well, didn’t see that one coming although UST’s certainly warned that something was up with the veracity of yesterday’s reversal mid-session. So Trump announced early yesterday evening that US would impose 5% tariff on all Mexican imports effective 10 June if Mexico didn’t stop the flow of immigrants into the US; he also said the tariffs would grow in 5% increments up to 25%. That spelled the end for risk as everyone raced for cover shortly after the Asian open. 2s gapped 4 bps lower in yield, taking rest of curve along. Volume has been very good overnight while illiquidity is becoming a concern ahead of US inflation data against the backdrop of a .11 year extension for Treasuries this month. Lost in the noise from south of the border were more aggressive statement from China (5:30 AM ET) that it was finishing preparations for a “blacklist” that would cover rare Earth sales to US. Oh boy….As of 8 AM ET, Treasuries are 4.5 to 6.5 bps lower in yield in a steepener, while US equity futures are down over 1% ahead of the US inflation data and the cash open.

The Asian session began with Japanese real money selling in US 2s and buying 10s, which didn’t look so good an hour later. Chinese PMI printed a “contractionary” 49.4 (last of 50.1 and expected 50.0), which only further stoked the risk off sentiment. Asian real money was active buyer of US 30s and received in USD 10y and 30y swaps throughout the Asian session; after Tokyo lunch, Asian real money became a better seller of rich 2y and 5y notes, but Japanese banks and central banks were willing buyers of the 2s while Asian banks bought 5s. Hedge funds received in USD 2y and 5y swaps. There was consistent buying in US 30s throughout the Asian session for month end, but the flight bid in the belly kept the curve a touch steeper. Treasuries traded sideways but in a choppy range for the second half of the Asian session. Locally, Aussie 10s shook off yesterday’s lethargy to rally 7 bps, outperforming 3y yields by 3 bps, and making a new all-time low yield at 1.47%, with good month end extensions helping the flattener bid. JGBs rallied 2 bps, finding massive support from a seller’s strike at the BoJ buyback operation today, with almost no offers in 5s or 10s. NIKKEI led Asian bourses lower, dropping 1.6%, while rest of Asian was mixed to slightly lower.

The European open saw a good bid to bunds and gilts to follow move in Treasuries since the European close yesterday, then a secondary bid to bunds on the back of a large drop in BTPs on the open, as Italy gapped 10 wider to core on stories that Italian government was looking at creative ways to meet debt servicing (such as “mini-bot, read IOU, for state debts); after trading as much as 15 bps wider to bunds, BTPs have since halved that widening on official denial of such a plan by Italian government. Soft flash German regional CPI added to the dour sentiment in the market as well. There was $600K of DV01 TU/FV/TY butterfly that was blocked shortly after the European open (2:21 AM ET), along with good European real money buying of US 10s. Central banks were again buying 2s and 3s along with spread product, although more focused on the safety of the Treasuries today. Macro accounts added 5s outright, and on the curve against 10s, CTAs were buyers of TYU and USU futures, and hedge fund interest to receive in 3s10s and 5s10s on the USD curve were more active mid-morning in Europe. The Chinese statement at 5:30 AM brought out another bout of risk off, but the arrival of NY has seen some minor RV profit-taking in the belly and adding to shorts in the long end. Banks were good buyer of bunds, with domestic banks and hedge funds selling BTPs. European stocks are down 1-1.8%, led by peripherals.

It will be a busy early morning, with Personal Income and consumption at 8:30 AM ET, Chicago PMI at 9:45, and Michigan at 10. Clearly the risk for the market is a soft inflation number that will further stoke the risk off sentiment in today’s market. Bostic speaks at 9:15 AM ET, with Williams speaking at noon. Once more for effect, we’ll mention that Treasuries extend .11 years, everything else a bit less. But that will keep an underlying bid to the market.

Okay, what to do with this bad behavior? Said yesterday that there was a gnawing feeling that we would blow through the highs from earlier in the week…just didn’t realize it would be this way. Going to respect the idea from yesterday and look to lighten up a bit at better levels. We tagged 2.145% in cash 10s overnight; that’s kind of middle of “nowhere” between 2.175% and 2.07% key levels. Think lightening up in front end through those levels makes sense, but would do it conditionally. Gamma is bid without early today, and when the noise calms down, you will get paid to short some here. As of this moment, looks like we have one more thrust up, should be bounded by 2.07% in cash 10s (127-08 equivalent in TYU9), then back off from there as June gets going. Risk is that we get very soft data and take out that 2.07% level. It’s going to be a fluid day. For choice today in TYU, let’s call the range 126-30 to 126-08+. If we can’t get through 126-13 for a test of 126-08+, it could get dicey. Below 126-08+, support comes in at 126-02 and 125-28. Above 126-30, resistance is at 127-05+ and 127-08.

Good luck this last day of May,