Risk on was the early theme this Hump Day Wednesday, and it is a fairly powerful risk move at the moment, highlighting “moment.” While US equity index futures opened lower last night in Asia, fixed income moves throughout the region and on the USD swap curve signaled that the market fully expects some legit fiscal stimulus and a dose of QE to boot, helping underpin risk throughout the night, or as those without a clue would call it “warming to the Biden victories” (yes, I am crabby and cynical about everything today, aren’t you?). As of 9 AM ET, Treasuries are flat to 2.5 bps lower in yield, yet another steepening day to crush a few more accounts, while US equity index futures are 1.75 to 2% better across the board ahead of cash open.
As referenced earlier, the early bid to Treasuries was driven by an initial risk off move in Asia after the post-FOMC surprise rout in US risk on Tuesday. Did the Fed really expect that greed wouldn’t entice the market to push for that next 50 bps ASAP? There was leveraged account buying of TYM and USM classic contracts on the reopen, and another round of levered account buying just before the Japanese open when rumor swirled that the BoJ would intervene via FX swap lines; when that didn’t occur, we actually got down to a little trading. Asian real money was a better seller of rich 5s to buy 2s and 3s, while also paying in USD 10y swaps. Asian central bank was buyer of 2s outright and on the curve against 7s, as hedge funds were better to add 5s30s flatteners in Treasuries. After Tokyo lunch, Asian real money unwound 5s30s and 10s30s steepeners in USD swaps.
Stepping aside for a second to highlight some of yesterday, the flows were clearly to selling belly of the curve which had richened smartly yesterday. Anecdotally, heard there was massive (MASSIVE) receiving in 5s and to a lesser extent 7s in USD swaps yesterday by portfolios that just couldn’t bear the pain any more; the pain from the duration they are losing in their HTM and MTM portfolios is palpable and they were one of the sacrificial lambs yesterday. The bid to upper left that was led by exchange was even more telling. There may not be a “short” left in the market (the Citi report overnight made me laugh: “all long positions in the market are now in the money”). That may well be fact, but try telling that to anyone managing a structural short. Anyway, that activity from yesterday is behind what drove the selling of rich belly overnight.
Locally in Asia, Aussie markets began to price in quantitative easing after yesterday’s 25 bps rate cut there. Spreads gapped, front end outperformed, and Aussie curve flattened marginally. JGBs saw aggressive buying from the outset on talk of imminent cut with the 5y sector there actually leading. Real money buying in JGB and Kiwi 10s was one of the main themes last night as well, with Japanese lifer buying JGB 20s. In 10y sector, JGB yields were down 14 bps, Aussie rates were 7.5 bps lower, New Zealand yields were down 3 bps. As for equities, Asian bourses held up relatively well, closing largely unchanged across the board, with countries that have eased down slightly and countries expected to ease up slightly. My, how nice….
Of course, rumor mill central was abuzz on the European open of emergency rate cut by BoE; to a lesser extent, there were similar rumors about the ECB, until statement released that said ECB Governing Council had conference call late Tuesday to discuss operational issues but not monetary policy responses. There was decent buying, but also large illiquidity, after all of London opened. RV account was better buyer of 5s on the curve after central bank sold 5s to buy more 2s and 3s, while Japanese lifer was seen buying beat up 30y sector, although far from the steepest levels of the night during the Asian session. Asian real money bought US 10s and received in USD 10y swaps, while at the same time selling cash bunds and OAT futures. There was actually better receiving in USD 5y swaps mid-morning in Europe as UK portfolios and macro types used the cheapening of that sector to get into better levels. When the BoE did not show up at 5 AM ET as was rumored, there was slightly better selling in gilts and then buxl, with Treasuries seeing early US hedge fund interest to sell 10s, but volumes were light. When the ADP number printed at 8:15 AM ET (soft owing to big revision lower), the market barely budged and it seemed nobody was even watching the number.
Today’s calendar in case you want to pretend to care includes the already released MBA and ADP numbers, along with Markit PMI at 9:45 AM ET and ISM non-manufacturing index at 10 AM. We will also get the Beige Book at 2 PM ET which may be worth watching just in case, while Bullard speaks at 6:30 PM tonight.
All right, so here we go with what we will call “Hump Day” although I think that is the way much of the market felt about yesterday. What an ambush by the FOMC! Guess we should have noticed that the head of the NY Fed Ops desk (Lori Logan) cancelled a planned speech yesterday morning; that would have been helpful. So you completely have hosed banks and portfolios, both bank and non-bank in this case. Chuckled when Bloomberg TV was all abuzz this morning about easing bank regulation; maybe Jay should start taking shots on Twitter at the administration and demand some fiscal policy easing???? Hmm. But I digress. For choice today in TYM, let’s call the range at 136-09 to 135-20+, but with little confidence on the upper bound. IF you trade back through 136-04 in TYM early today, throw these numbers out the window and look for .85% in cash 10s pretty quickly. As for support, watch 135-24, the aforementioned 135-20+, 135-18+, 135-14, 135-06+; resistance comes in at 136-04, 136-09, 136-24, 136-28+, and then your best guess again….
Good luck out there today and enjoy your hump day….