It’s been awhile since we have written anything, and don’t think anything has really been missed. That said, the heat on the boil sure feels like it’s starting to increase. Let’s start with a couple items on a quadruple expiration Friday devoid of any economic reports, with only Fed’s Kaplan scheduled to speak at 1:30 PM ET. Then maybe a couple observations as well….
*On the news front overnight, would have to say the biggest item was BoJ meeting that saw a downgraded CPI forecast to “between .5% and 1%” from a previous “approximately 1%.” Not that they wear it as a badge of honor, but BoJ has been very good at calling inflation locally and globally over the last decade, not that they have figured out how to deal with those assessments either. This is important to put in the data bank and remember.
*JGBs bull flattened on the BoJ statement, with 30y and 40y yields down over 1.5 bps. Treasuries were better bid on the combination of the dovish BoJ and WSJ report that China was ready to unveil retaliatory tariffs against the US. There was Asian bank buying of 10s along with CTA buying of FV and TY through yesterday’s highs, but Asian real money was a better payer in USD 10y and USD 30y swaps while Japanese real money sold US 10s to buy JGB 10s. 5/10/30s fly in USD swaps saw RV buying shortly after the European open.
*Europe was a choppier affair again, with bunds leading the way in both directions. That said, Reuters headline at 3:30 AM ET that US was readying second round of tariffs on an additional $100BN in Chinese goods took Treasuries back to their highs. Peripherals are doing well today, which put early pressure on bunds and Treasuries followed along (sale of 2076 Ultra 10s for 127-12 at 4:58 AM ET dumping $225K of DV01 on market), but very good and aggressive buying of bunds by Japan (not normal) resulted in bunds catching a 1/2 point bid just before NY arrived; Treasuries had already started bouncing on the Reuters story, with the bund bid taking Ts through their earlier overnight highs.
*So for today, call the range in TYU 119-25+ to 119-13. But that’s small potatoes for now:
+There are bigger moves afoot in the markets. Take a look at EM today; since Wednesday, you can just see the central bankers in all these countries running around plugging leaks in the damn, and the US just seriously ratcheted up the upstream water flow on Wednesday.
+Peripheral spreads are tightening nicely, and Draghi made sure to throw a lifeline on Wednesday, but I don’t know that a 4-man raft is really enough when the waves start rolling in next quarter. All you need to do is look at what Japan did overnight: instead of buying peripherals like they often do when they need paper out of Europe they went the safe route and lifted bunds. They may not be able to buy inflation in Japan, but they know when it’s time to buy safety, just in case.
+Japan just told you that the current political climate (tariffs, etc) along with EM and European peripherals (all right, at least just Italy for now), is a recipe for taking the wind out of the recent uptick in inflation. Bears watching carefully.
+Vol is getting treated like the red-haired stepchild most believe it will be for the near future. It’s not there yet, but it is getting close to predicting a major move in the market. There is this huge trade that has been plied this week in USD space, buying of TY 120/122 call spreads, for August (42 days) and September (70 days) expiries, so roughly 2.90/2.65% spreads. Something is afoot, but for some reason nobody is sharing, but it sure feels like it ties into something that is going through OTC. I think this ties into the bigger picture.
All right, enough, you get the general idea. There is a lot at play, maybe even enough to make it worthwhile to keep clients up on market again, because that sure hasn’t been the case for the last month. We’ll see; in the meantime, have a great weekend….
mjc