Volume and participation has been rather quiet since the open last night in Asia. But don’t be fooled: Japanese year end, Brexit, US supply, the return of TLTRO were all important variables overnight and thus far today that may be damping volume today but remain key drivers (and none of them REALLY risk positive). Volume remains paltry, not just in US markets, but no one is ignoring the trade.

Volume overnight was horrible, not breaking 200K TY contracts until well after 7 AM ET. But even with most of the world glued to the show that is the Brexit debate in Parliament, EU swap spreads were driving wider for the first time in a week and US spread product was putting in an absolutely awful day, even more so versus its recent performance. What gives there? Well, first of all, the end of the Japanese fiscal year is resulting in some repatriation as expected, as well as significantly tempered interest in buying spread product, specifically MBS as had been the case for the first ten weeks of 2019. After yet another very good day yesterday, mortgages stepped on it hard last night when Japan completely ignored the product, even as it got marked wider. Be careful, because that trend may very well continue for the next two weeks. VERY INTERESTING though, and a huge point, Japanese accounts that would normally be selling their Treasuries have actually been holding onto them and dealing with not getting the profit booked because they are leery of a risk off move (Japanese accounts have grown extremely disheartened by the US/China trade negotiations and the US/N. Korea negotiations) and not being able to get their Treasuries back on April.

Then there were swaps in Europe. Since TLTRO resumption was announced by the ECB, the long end of the bund curve has led all sectors across all classes tighter in the Eurozone, as analysts pointed to model-driven receiving by ALM types in Europe. True to form, buxl put in a masterful four sessions against the curve, with swaps tightening even more. Then all morning in Europe, the curve steepened and EUR swap spreads widened, all on the back of Allianz indicating indicating that TLTRO would only cause roughly a .2 year duration mismatch at the extreme, greatly lessening any need to receive in long end. Some of that widening has been reduced on the back of deal flow, but this bears watching. End of day, don’t see how Europe avoids a duration grab at some point, so much of a backup will be a gift.

Then there is today’s US $16BN 30y reopening at the top of the hour. An okay 3y auction and a pretty solid 10y reopening without any real concession has everyone chipper on today’s 30y. The pullback in Europe took some of the pressure off 30s in repo as 30y actually went positive in repo for the first time since March 1. However, 10s continue their torrid roll on special with 30s not far off. There has been almost no concession since the reopening was announced, with only a pullback yesterday morning, and you are roughly 7 bps more expensive outright than at announcement. That said, with the WI trading at 3.012% now, you are only 1 bps through the level the February new issuance got done at (3.022%), and still better than the 2.958% of last July. I guess the point is that the concession was built in ever since the Fed’s dovishness in January, with the belly leading since then. Stripping also looks to be a bigger factor in this reopening, as stripping is running pretty heavy thus far this year.

So where does that leave us in 10 minutes? Well, consensus seems to be for a decent auction, but I think that directs who usually step up here may be willing to watch a little in the belief that aggressive bidding could start a larger duration grab. Thinking we get softer bid to cover, dealers (happily I will add) take down a larger share, and we see bids show up closer to 2.025%. That’s my guess, and if I am wrong, see you on the other side of 2.95% in 30s. Arggghh…. Recent averages in 30y have given us bid to cover of 2.21, dealers taking down 28.4%, directs taking 11.8% and indirects walking away with 59.8%. We’ll see….

Have a good afternoon,

mjc