Markets have traded fairly contained thus far today ahead of a busy rest of week kicking off with tomorrow’s FOMC meeting, with pretty much every asset class relatively unchanged but having traded both sides of flat. There was talk of taking back some official accommodation in Asia, while Europe saw an official announcement from Japanese Postal Insurance Co. that is global bond supportive, ex Japan. Like I said, mostly noise for now but relevant to bigger picture. As of 8:30 AM ET, Treasuries are .75 to 1 bps lower in yield while US equity index futures are steady to mixed ahead of the cash open.

Treasuries opened softer in Asia, after yesterday’s rough slog of a Monday, with US real money actually selling 10s on the Tokyo cash open that left Treasuries on the defensive right through the Asian session. The flow in early Asian markets saw better paying in November RBNZ OIS, moving AUD and JPY rates as well; volume in Aussie 3y was large and took 3y yields out of their recent range (old low at 99.20 giving way). Ironically, risk traded better on all the repricing of front ends, even with news stories of more hawkish rate talk to come from RBA. On the curve, the early theme was some Asian real money was a better seller of 10s ahead of the Tokyo lunch, but coming out of the break, Japanese real money was a better buyer of 30s. There was flattener interest from RV accounts in US 2s10s both in Treasuries and on the swap curve, while same accounts were paying in JPY 10y swaps as well. After backing up rates, MoF auction in new JGB 2y went well, strong bid to cover amidst strong pricing. Risk received further support from news stories that US was going to extend tariff suspensions before they expire at the end of this month. Asian stocks were mixed with China small lower while rest of Asian bourses traded small better.

Treasuries were again on back footing into the European open, with all the noise around the Brexit drama pointing toward risk on. That of course didn’t last long as the “kick the can” strategy only forestalls the inevitable. Gilts saw macro buying of very long end, with RV then selling UK 25s to buy buxl contracts; Treasuries were dragged higher by the moves in UK and EU rates. Japanese Post Insurance Co announced further plans to buy foreign bonds unhedged {https://blinks.bloomberg.com/news/stories/Q04L4MDWRGG2}, which follows on the heels of other JPY-denominated insurers looking to do the same; this isn’t a new story, but is a reminder of where Japanese investments will flow and why JGB long end took that first header at the start of August. US long end benefited most from the news story, with better macro buying of US 30s, Japanese fund receiving in USD 10y swaps and better RV interest to buy US 5s against JGB 5s. As you can see from the European flow concentrated in JPY account flows, once UK and London repriced, the European session got very quiet. A good UK 9y Linker that saw strong bid-to-cover amid aggressive bidding underpinned UK while Eurozone fixed income has led the way since mid-morning in Europe. European stocks are mixed, FTSE pressuring rest of continent lower.

Today’s calendar remains light ahead of tomorrow’s FOMC announcement and Friday’s NFP report. In a few minutes, we’ll get monthly S&P CoreLogic housing data, while at 10 AM ET we get Consumer Confidence and Pending Home Sales. That is it for this fine October day.

So RBA, RBNZ, BoJ are all walking back aggressive forward rate cut prospects, and you just gotta wonder what the FOMC will say after cutting rates tomorrow. Okay, so this will be a neutral cut and Powell will say it is time to reassess. That’s the guess from here: there is concerted move to not recreate the situation of six months ago when Fed was hiking while commodity-based countries were easing. “Keep all the players headed in the same direction.” Further, this is not Nobel Prize-worthy insight but rather an acknowledgement to how the market has traded as of late. So knee-jerk reaction tomorrow should be further back up in USD rates, but look for that to reverse in a flattener no later than next Monday if not into the NFP report on Friday. Just the 2 cents from this seat…. As for range today in TYZ, for choice let’s call it at 129-15 to 129-01+. Market should try to do a bit better and squeeze a few new weak shorts in an otherwise quiet day. Take out 129-03+ though and we will make a new low for the move down to at 128-21+ (1.91% equivalent cash 10s), this being a level to watch closely after tomorrow’s FOMC announcement. If we take out 129-15 today, watch 129-18, and then single prints up to 129-24+. Enough for now. Try to stay awake and have a great Tuesday….
mjc