Euro supply kept market quiet, but trouble heating up quickly now…(Thursday)

Very quiet overnight session with markets mixed to very tamely better bid for risk, but no true direction for the day yet as world waits on US for direction. Massive official European supply in belly of curve kept a lid on rates after yesterday’s impressive rally led by bunds and Treasuries, while equities marked time. However, since NY has arrived, seeing some activity that indicates yesterday’s observation about today being a seminal day for equities will come to fruition. Watch 2676 in SPX if we get moving. As of 8:00 AM ET, Treasuries are bull flattening again, with 30y yields down 4 bps and 2y yields up .75 bps, while US equity index futures trade basically flat ahead of the cash open, having given back all their gains from overnight.

Treasuries opened slightly better bid last night in Asia, of course devoid of any volume throughout the session, with Asian funds small buyers of TY and US futures. Another block trade went through just like the day before, with the same notional amounts and direction, thirty minutes earlier today than yesterday as client added another $180K of DV01 in 7s30s flattener, today buying 800 USM for 180-12 and selling 2000 TYM at 139-01+ (9:41 PM ET). However, into Tokyo lunch the minimal flow turned more toward Japanese real money selling cash 10s while Asian banks were better sellers of 5s and also paid in USD 5y and 7y swaps. Once again, volume overall was better in swaps than in cash or futures, not that any of it was meaningful. There was Asian real money receiving in USD 30y swaps, along with some 10s30s and 5s30s flatteners that went through in swaps as well.

Locally, the story was about liquidity enhancement operations in Japan that actually went well and New Zealand auctions that went well also. JGB 10s dropped 1 bps on the night while Kiwi rates were 8 bps lower in yield. Australia participated in the rally as well, with a good 5 bps flattener in 3s10s, as 10s closed 6.5 bps lower on the session. Everyone seems to be on board with the duration grab since last night it seems. Wonder how that will end after the shorts get squeezed out? Equities in Asia were mixed overnight, China slightly better, the rest of Asia slightly worse, although the NIKKEI was down 1.3% on speculation that the virus was spreading across Japan.

The long end of the US curve rode the late Asian buying/flattener interest to trade back at unchanged into the European open before being dragged lower by European supply. Spain, France and the UK all issued across multiple tenors today, Italy announced plans for massive issuance later in the month, and corporate supply continued unabated. Concession selling by dealers and RV accounts was the story early in Europe. Interesting that Italy continues to tighten since late afternoon yesterday, now 14 bps better in 10y space to bunds, as the move to backstop peripherals continues to gain ground. There continues to be decent domestic and Asian real money bid for BTP 10s and 5s, while macro account sold bunds outright and against BTPs. The Spanish 3y, 5y, and 15y supply all sported a small tail, but with good bidding. The same was true for the French 3y and 6y issues, while the French linker went fine. UK 6y gilt supply was the same, while UK 30y supply went well. Once supply was out of the way, markets trended back toward unchanged on negligible volume. European equities are trading slightly better on the day, but clearly waiting on the US market for direction.

Treasuries were very quiet in Europe, horribly so. They merely followed bunds and gilts on both the concession trade and the bounce post supply. There were some hedge fund efforts to pay in USD 7y swaps, some RV 5s10s flatteners on the USD swap curve, and a bank paying in USD 30y swaps, but all the flows barely registered. We have seen Treasuries pop since Japanese PM Abe announced that he was expanding the state of emergency to cover all of the country at 7:30 AM ET. There was hedge fund buying of 10s, with CTA buying of TYM and USM contracts above yesterday’s highs.

Today’s calendar includes the much awaited claims number we all like to fawn over; will say again to watch the continuing claims number as if it can fall because PPP is putting people back on payrolls that would be a ray of light in the forest of darkness right now. Otherwise, it’s just very large noise! We also get starts and permits at 8:30, which of course will not be good, and the Philly Fed Index. After that, it’s wait for the usual Fed POMO (9:50 AM ET until 12:20 PM, as usual). And of course, the corporate calendar will require attention again. After an estimate at the beginning of the week for $35BN in issuance this week, yesterday’s healthy $30BN (ALONE!) left the week at $68BN, with expectations now set for $98BN for the week. Not bad, and glad to see the Treasury market doesn’t seem to care!

Okay, so we just took out yesterday’ objectives in TY and US contracts that we had stopped 1/64 and 2/32s shy of yesterday. Says here that we are going to see what equities are made of today, just as we had warned yesterday (seminal Thursday!). Oh boy. Protection is getting expensive; if you don’t have it, it may be too late to find it at a reasonable price. Long end should lead early in the move higher, but belly will perform if the 2676 test in SPX is truly going to happen. And Lord help us if we don’t hold there. For choice today in TYM, call the range at 139-27 to 139-04+. Oh boy, that’s pretty aggressive and very risk off, as it also calls for more 30y leading early. As for support, if you can take out 139-04+, you can go right back to 138-28, while below there support comes in at 138-25+, 138-20+, 138-11+/12+, 138-02. Resistance meanwhile comes in at 139-13+, then 139-19, the 139-27 level, 139-31, 140-12….and then good luck. Be careful out there today…it’s Troublesome Thursday!

Be well and be safe and good luck,