end of Golden Week sees cash put to work, but risk bid dominates thus far (Thurs)

Let me be the first to celebrate the return of our friends from Golden Week! There was actually thematic flow last night with everyone around. Early Japanese support of the rates market turned to better selling in Europe, while risk started softer but has traded bid since good data out of China last night and talk of discussions between US and Chinese trade negotiators. A flatter UST curve has turned steeper during the European session, as the Asian buying gave accounts better levels to short the long end. The dovish BoE has added to the risk sentiment into the US open. As of 9 AM ET, Treasuries are .5 to 1.5 bps lower in yield, led by the belly, while US equity futures trade 1-1.5% higher ahead of the cash open.

On the open in Asia, Japanese real money lifted cash 10s in moderate size, but were well bid behind, while also lifting US classic futures; meanwhile, Lifer bought 30s, selling 2s and 3s against it, as clearly this 1.35/1.42% level in US cash 30s represents value to those accounts. The curve bull flattened as 30s rallied 3.5 bps from their 3 PM marks. Japanese real money lifted mortgages after Tokyo lunch, while Japanese lifer bought some 10s as well ahead of the European open. Asian banks were better sellers of 10s and paid in USD 7y swaps ahead of the European open. Just to be clear, while this is great news for seeing some participation come back and today’s volumes are good for the last month, the numbers still leave a bit to be desired.

Europe saw a complete reversal of the flattening bid, with sovereign supply (France, Spain) and corporate calendar all weighing on rates in Europe and the US. European real money sold US 30s small and 10s against buying 2s on the curve from shortly after the Europe open through mid-morning. There was a macro account that did 3s30s steepeners in Treasuries, while RV accounts focused more on selling TY contracts (increased 7y issuance from US being their motivation) outright and against FV contracts. Since NY walked in, there has been portfolio buying of 5s with better deal-related selling in 10s and 3s, but volume has tapered off since the auctions wrapped up in Europe.

Better export data in China (+3.5% vs expected -11%), speculation of trade meetings via phone between Chinese and US delegations this weekend (versus sabre-rattling yesterday that punished risk late), and a price hike by Saudi Arabia for crude all supported risk from mid-session in Asia through the European morning. Locally, JGB trading reopened to steepening bent matching the rest of globe’s work this week, while Aussie 10s led bear steepening on speculation of a sydication in 15y from AOFB. New Zealand rates diverged, rallying after a fair 5y auction, to see yields in Kiwi 10s down by 4.5 bps, while JPY and AUD 10y yields were both 2 bps higher. Equities were mixed in Asia after the late swoon in the US and before US equity index futures really went bid mid-morning in London, as major bourses in Asia all closed within .5% of unchanged for the session.

From the outset in Europe, core rate markets were under pressure with heavy Spanish and French sovereign supply, along with the usual growing corporate supply. Dealers and hedge funds sold bunds and buxl aggressively as that is where most of the sovereign supply tracked. Once France (8y, 10y, 32y, 40y, decent demand but mediocre bidding especially in longer end) and Spain (3y, 5y, 7y, 30y and 14y inflation, better bidding mediocre demand except for the inflation 14y) were out of the way, bunds and buxl led a bounce, although still much steeper for the curve on the session. Peripherals are mixed after the supply, reversing some of their early weakness on the passage of large issuance. Gilts traded quietly ahead of the BoE announcement (dovish, looks like they will increase buying soon: 9-0 to leave rates, but 7-2 for no change to borrowing right now (2 in favor of GBP 100BN increase right now). Gilts are mixed and steeper for now, while European stocks trade .5% to 1% higher.

Claims were the only data thus far, with very stubbornly high continuing claims portending some bad news for next month’s NFP number. We will get consumer credit at 3 PM ET. Today’s Fed speakers include Bostic right now, Kashkari at 12:00 PM ET, and Harker at 4 PM ET. Obviously the two concerns of the market today will be tomorrow’s NFP report and corporate issuance, while attention will also be paid to next week’s supply deluge on an rally for Treasuries. Already we have 9 HG deals lined up, after yesterday’s very active $29BN day on 17 deals, taking the total for this week to $75BN in new supply, easily blowing through the early estimate of $67-$75BN! Certainly no lack of options if you have cash sitting around….

Tomorrow is NFP. Simple enough, but certainly an event (and risk) we have never seen before. Think there are much bigger things at work than that optically impressive data point at 8:30 tomorrow. For the next 5 sessions we have the competing interests of dealers (concession building) and real money (trying to decide where to buy) that should keep things interesting. I will probably take a lot of grief for this, but I say you have to add some gamma here for next week. Already we have seen much better interest to sell vol overnight in futures space, largely via wings (put fly and strangles primarily) that should continue this morning as gamma should come off (old horse, old tricks). Because I am ALWAYS bullish these days (risk/reward, that simple), I would buy a TYN (July TY, 6/26 expiry, 50 days) 25% delta put, like a 137 put, buying the delta.

For choice today in TYM, call the range at 138-30 to 138-18, after an overnight range of 138-25+ to 138-16. Take out 138-18 and you will be trading 138-02 ahead of the NFP number as crazy as that sounds. Take out 138-25 and you could (small letters) trade 139-02! Support in TY comes in at 138-22+, the 138-18 objective, 138-11, 138-08, 138-02, 137-28, 137-22; resistance comes in at 138-28, then the 138-30 objective, 139-02, 139-05, 139-11+/12, 139-16.

All right, have a good and healthy and safe Thursday,