After a very quiet Asian start to the day that actually saw better risk sentiment for a few moments early in the day, the arrival of Europe seemingly unleashed a torrent of negative sentiment, with risk crumbling led by financials as global fixed income rallies hard. Call it a pretty perfect storm between crisis, month end, and illiquidity for now. As of 8 AM ET, Treasuries were .5 to 1.5 bps lower in yield as the curve flattens while equity futures were back to flat.
As noted, the Asian session was quiet, with Treasuries flat-lining either side of unchanged on the day through the entire Asian session. Japanese corporate accounts were better sellers of US 5s and 10s ahead of quarter end for accounting purposes, but real money again kept its powder dry. Asian real money did lift spread product, notably a few mortgages to keep some support for Treasuries, but the that was about it for the session in USD flows. Asia opened to better risk as NIKKEI traded slightly higher after the open, but couldn’t hold its early gains once China arrived. CNH had yet another crazy ride, with talk of central bank selling and specifically selling out of Taiwan, with Chinese stocks taking the brunt of the pressure. Aussie 2030 issuance saw decent demand that helped flatten the curve there as quarter end funding continues to pressure the AUD front end. BoJ kept purchase sizes constant, combining with the risk off sentiment to bid JGB 10y on the back of first month end extension buying on behalf of Japanese real money accounts. NIKKEI ended down .3%, but China was down between 1.5% and 2% across its various indices, helping to drag rest of Asian stocks down roughly 1%.
A block buyer of $255K in 7y DV01 (+3400 TYU for 120-01 at 1:32 AM ET) got the party started in Europe, with early deal-related and issuance selling in bunds giving way to much better buying by hedge funds in bunds and US 10s, by central bank in US 2s, by real money in gilts and bobls, and by RV accounts in Buxl and US 30s (the last one on the back of bank stocks cratering). TY took out resistance as CTA accounts lifted TYU and then USU, with macro account selling expensive US classic to buy buxl. Financials came under pressure on seemingly every release, with ECB data that showed Italy was a large buyer of EGBs since May (i.e., when the crisis there heated up again) that gave the market a clear roadmap of what is likely to come if this crisis isn’t resolved. European real money used the strength in T’s to sell 2s and 3s, with RV selling 5s outright and on the curve ahead of today’s US 5y auction. The risk off sentiment remained until about 7:45 AM, when US Treasury announced that Trump was not invoking the harshest measures against China (BN: *TRUMP DECIDES AGAINST HARSHEST MEASURES ON CHINA INVESTMENTS). Treasuries and gilts pulled back, but Buxl strength has held bunds up and caused a nice move on the cross-currency rate spreads.
Sorry, but it seems like every day we open another door and see a hungry tiger waiting to attack. So today we learned that Italy knows that it is a house of cards and so has been buying tons of EGBs since May? And that’s a surprise how? But the market isn’t prepared. And there will be some wild currency swings given the Trump negotiating style? Surprising how? Well, we hit key resistance, even tagged the next level before pulling back. Still think we can get at least a minor pullback before it get real ugly next month, but with month end it’s getting dicey. So for today, step up and say the high is in and for choice call the range going forward today in TYU at 120-08 to 119-27. Take out 120-08 and we won’t be stopping at 120-11 as we should see 120-15, then 120-26, then 121-03 then the moon. If we get through 119-27, it will get interesting as we could then open the way to trading 119-22+ or even 119-13+, but I don’t see that in the cards for today. Still like a pullback to 3% in cash 10s after July 1, but it’s seems like a long time before that date right now….
Today’s calendar includes trade data and durable goods at 8:30 AM ET, followed by pending home sales at 10 AM. Quarles speaks at 11 AM ET in Idaho and Rosengren should be interesting at 12:15 PM ET, speaking on ethics and economics (I swear, no comment here!). Treasury will do a double dip slate today: $16BN 2y FRN at 11:30 AM ET followed by $36BN new 5y notes at 1 PM ET. Enjoy….
Have a great hump day,