Fed adjusts SLR rules; massive EU supply; quiet but orderly so far (Thursday)

The world is calmer this April 2nd than it has been in many weeks. Risk trades very small better bid at the moment, Europe has huge issuance day, everything is moving through the pipes without a clog so far, albeit on a very slow flow as volume remains extremely subdued. Risk is supported by better crude levels as well today, after China announced intentions to buy crude for reserves and Trump implied a deal was imminent between Putin and MBS. As of 8 AM ET, Treasuries are 2-4 bps lower in yield from 3 PM ET, with US equity index futures up a little over 1.5% ahead of the cash open.

Late yesterday, the Fed announced a change to the Supplemental Leverage Ratio (SLR) rules effective for one year, excluding Treasuries and deposits at all FRBs from calculation of a bank’s SLR. In effect that should leave more funds to be loaned by those banks with assets over $250BN; the Fed believes that the expanded balance sheet will result in potential additional leverage of approximately $1.6TR for these banks. Treasuries rallied after the announcement at 4:46 PM ET, gapping 2-4 bps lower in yield. 30y swap spreads have widened, 2y swap spreads have tightened on expectations of banks being willing to hold more paper in long end now and increased issuance for front end. For those dealers who had not yet published the “swap spread tightener trade,” last night was all about getting the idea out to people (i.e., GS is now in the trade).

Back to the market, Treasuries opened better bid from 3 PM marks in Asia, but largely in line to where they went out at 5:00 after the Fed’s announcement. There was early Japanese real money buying of 30s, along with a US money manager lifting 10s and 30s that helped take us through yesterday’s highs in the long end before some Asian bank selling of 7s and macro account selling of 10s took us off the highs. After that, Treasuries chopped around, with levered accounts better axed to sell belly; Asian real money was a better buyer of 5s and mortgages again, but a seller of 30s. Later in the Asian session, Japanese lifer lifted 30s, while Asian central banks began buying some 3s and 5s.

Locally, with a backup in 10y yields on concession ahead of JGB supply, MoF’s auction of JGB 10s went well: 4.19 bid/cover ratio and solid bidding, albeit for the highest yielding supply in almost 2 years (that will happen with targeted rates, note to the Fed). Interesting that MUFJ/MS took down almost half the auction, speculation being it was a single customer order. Aussie fixed income backed up after RBA took some of the punch bowl away, announcing smaller buyback intentions for the long end. Japanese 10y yields ended the session 1.5 bps lower, while Aussie rates backed up 8.75 bps, and Kiwi rates were flat after their rout yesterday. Only news during the Asian session was announcement that China planned to start buying cheap oil for its reserve fund; of course, then Trump said he believed Saudis and Russia were close to a deal on oil. Too bad it’s six weeks too late! As for Asian equity markets, stocks were mixed, with Japan down 1.3% but rest of Asian up marginally.

Once again, European rate markets came under early pressure, leading US fixed income off its earlier gains. Europe is seeing simply a massive dump of both sovereign and investment-grade issuance today. Bunds were sold aggressively from the outset, the inflection point for European curve today. RV accounts sold US 10s against bunds after a minor lag in US response. Spain issued 3s (weak), 5s (strong), 10s and 30s (both fine); France issued 9s, 10s, and 20s, all of which tailed largely but actually found decent interest to bid at those better (for the buyer at least) levels. The UK issued 22y gilts that went fine. Data was a nonevent in Europe, just like it will be in the US today. Treasury flows really came to a halt after the dealer and deal-related selling in Europe. Peripherals trade quietly, largely in line with core, while awaiting the IG deal pricing that will soon take place. European equities trade slightly better, but well off their best levels of the evening.

Today’s data will again not matter. Claims can be anything they want, it’s all optical for now, like we said last week; as we said then, watch the continuing claims number AFTER next week to see if the payroll protection plan steadies layoffs and furloughs. As for the rest of the data, we know the economy has ground to a halt. More importantly, the Fed will conduct POMO starting at 9:50 AM ET (7-20y sector) and ending at 2:50 (0-0.25y sector). Today’s are important at 9:50 for the 7-20y and at 2 PM for the 20-30y after the Fed’s SLR easing last night.

Had all kinds of signals of a breakout for Treasuries yesterday, and it looked great until we tagged the old highs. Then we trade sideways. Fed eases SLR rules, we make new high, and then go nowhere. Nutshell, fixed income trades very tired here. For choice today in TYM, let’s call the range at 139-22 to 138-26, after an overnight range of 139-14+ to 138-30+. Look for us to be bid into the buybacks and then offered later in the day when our (GROWING!) slate of issuance hits. Resistance comes in at 139-17, 139-22/22+, 140-02, 140-11, 140-18, 140-24; support comes in at 139-02, 138-31, 138-26, 138-23/22+, 138-16+, 138-13+/12+.

Have a good Thursday,