USD assets are a sea of red this morning, for a number of reasons. The early trade in Asia was risk on after Pelosi comments positive toward a retroactive, large stimulus deal; technical selling in Treasuries took over, but McConnell comments throwing cold water on any deal eventually came out to pressure . Volumes have been very healthy, even though liquidity has not been. With a 20y auction on the docket today and technicals driving the action, most players are more than content to let the market drift to higher yields for now. As of 8:45 AM ET, Treasuries have shaved their losses in half, still bear steepening with yields .5 bps to 2.5 bps higher led by the 20y sector; US equity index futures are all small better at the moment ahead of the cash open.
On the reopen last night, US money manager sold US classic futures and cash 10s, while Japanese real money chased the market lower, selling US 5s, 7s, and 10s in keeping with their recent preference to lighten up on Treasuries. Hedge funds were sellers of 30s outright and on the curve against 5s as stocks traded to their highs of the session after Tokyo lunch. As per usual, saw Asian bank paying in USD 5y and 10y swaps, but also saw them sell 5s outright. There was some hedge fund paying in USD 30y swaps just before London walked in, along with early RV selling of 20s ahead of today’s supply. As per usual though, there was official buying of mortgages and spread product, along with receiving in USD 30y swaps with equities at their highs, those flows helping steady Treasuries.
Stocks began to come off in Europe, but fixed income largely turned a blind eye. Better selling continued through the European session, with Treasury weakness spilling over to European markets. As equities gave up all their early gains, Treasuries pared their early losses but still trade heavy. Better macro and RV selling of 20s, outright and against 5s, to set up for the supply; better receiving in USD 30y emerged mid-morning, with some bank buying in the belly. Flows were chunkier on the buy side without moving the market much, lighter flows when sellers were the initiator with market illiquidity helping the market slide easier.
Locally in Asia, yields backed up in sympathy with Treasuries and on overcrowded trades in Australia. Too many positions in Aussie 3s10s flattener after Lowe comments last week got exposed as rates came off, causing a nice 4 bps steepening there as Aussie 10s sold off 4.5 bps; Kiwi yields backed up 5 bps after a new 2028 TAP for next week was announced. JGB yields were off .5 bps, with support coming from cross-currency unwinds against USTs and Aussie 10s. Asian equities trade small better, except for China that saw small losses.
Treasury weakness and high corporate/SSA issuance weighed on European rates, while hope for a BREXIT solution added pressure on gilts. After good dealer selling in German 30s and bobls early in the session, there was a block buyer of 5250 RXZ for 175.51 that put a floor in the market for the session. There was an unwind in German 2s10s steepener mid-morning in Europe, along with better selling of bobls in the last two hours. Minor risk off in Europe has peripherals trading a touch wider, Spain seeing better real money selling in 5y space to keep the pressure on peripheral rates. Higher inflation numbers in UK and increased borrowing estimates have helped keep pressure on gilts throughout the session, with banks selling 10y gilt. European equities are down roughly 1% as the US arrives.
All we have on the calendar today is the Beige Book at 2 PM ET, along with a series of Fed speakers: Mester at 10 AM ET, Kashkari and Kaplan at 12:00 ET, Barkin and Quarles at 1 PM ET, while wrapping up with Bullard at 4:45 PM ET. The real event today is the $22BN in reopened 20y bonds at 1 PM ET. Other than that, it’s watching the tape from comments from Pelosi/Mnuchin/McConnell/Meadows/Trump/Whomever else you care to watch!
Simply put, Treasuries trade heavy here. They trade off on light volumes in larger measure as opposed to the larger buy actors that don’t bid the market as well. You also have options expiration for November serials on Friday that show higher interest on the put side for expiration. Further, you have overbought conditions in cash 10s and 30s, with dealers only too happy to let market back up for the 20y supply. Just feels like all dollar markets are tired of the threats, tape bombs, and noise around a deal that will get done at some point. By the way, sure seems like equity indices are setting up for a buy the rumor/sell the fact trade, if ever there was such a set up. But we will watch it.
For choice today in TYZ, call the range at 138-27 to 138-10, with a range thus far of 138-24+ to 138-13. Resistance comes in at 138-21, the 138-27 objective, 139-02, 139-05/05+, 139-11, 139-15; support comes in at 138-10 objective, 138-09+ 138-02, 137-25. Will put out update on Open Interest tomorrow. Still think market stays under pressure until the 20y with risk of bounce if investor demand shows up, as it should with yield above 1.375% level as it is now. Of course, you can navigate the tape bombs; I am ducking for cover!!
Have a great hump day,