Day 3 of this week’s massive supply in corporate and sovereign issuance globally finds fixed income trading better while equities mark time. More dovish CB talk (RBNZ talks negative rates), healthy demand for paper, all have the attention of traders today. USD fixed income volume has been better than normal thus far, with a higher than recent normal intensity to the trade ahead of Jerome Powell appearance (9 AM ET) and US 30y auction (1 PM). As of 8:15 AM ET, Treasuries are flat to 2 bps lower, led by the 30y sector, while US equity index futures are less than 1% higher ahead of the cash open.
Treasuries were better bid from the outset overnight after a very stellar US 10y auction that was well bid by overseas accounts (read: Asian, especially Japanese) and some deal-related receiving in US 10y swaps, after 10s were the focus of corporate supply yesterday as well. Asian real money lifted 30s shortly after arriving to the party last night, while lifer lifted WN ultra; RV account used the bid to set more shorts ahead of today’s supply. There was hedge fund covering in FV and cash 3s on the very dovish RBNZ statement, but after Tokyo lunch there was better Asian bank paying in USD 5y and 10y swaps along with hedge fund adding USD swap 10s30s steepener. Just before London open, central bank lifted under-performing intermediates and bought mortgages, all normal activity for this crew, continuing to buy after the European open.
Treasuries caught a bid in sympathy with a strong open for core in Europe; even with large official supply, it seems enough shorts had been set to spring the squeeze. 30s again led the way, with Asian real money lifting the sector, macro account buying US 30s to sell German 30s at auction. Dollar continued to rally against yen, as 30s led the move back to the Asian highs for US, while bunds exploded even in the face of large sovereign and core issuance. There has been almost no concession and almost as little RV set up today for all this supply, as if the shorts were already attempting to unwind. The arrival of NY saw hedge fund selling of cash 5s outright and on the curve against 2s.
The RBNZ dovish statement may have been more dovish than the market expected. An increase in QE was priced in, but the statement alluding to negative rates (“could” become an option) caused a massive flattening on the NZD bond curve and a 14 bps rally in OIS. Meanwhile, Aussie rates rallied aggressively into 10y supply even though the AUD 50BLN order book (huge interest out of Japan on an x-currency basis) caused the AOFM to virtually double the size of the issue to AUD 19BN. The auction was easily digested, but Aussie rates gave back much of their bid late in the session. Japan saw steepening pressure ahead its long end supply in an otherwise quieter session there. JGB 10y yields were down .5 bps, AUD yields were down .5 bps, and the star performer, NZD, saw yields down 12 bps. Asian equities were mixed, with NIKKEI down .5%, China up small, better bid to the Nifty (India).
Europe arrived to large corporate supply, and even larger sovereign supply. Normally that would mean early and aggressive concession selling. Not today. Bid, bid and more bid, with the shorts squeezed the whole way. UK 30y linker was well bid, German 30y issue was well bid even with a decent sized tail, even Portugal’s 5y and 10y sales were well bid, especially the longer tenor. Italian BTP supply in 3s, 7s, 15s and 20s met with mixed results (no comment) but got done, even finding some good bidding for the 15s. SPGs weighed on sovereigns early in what appeared to be the only true concession trade of the day thus far, but have bounced smartly to outperform bunds by 4 bps right now. Even Italy is outperforming bunds, not that bunds aren’t doing well, flattening with 10y 2.5 bps lower on the session. Flows have been heavily to real money and central bank buying 10y sectors everywhere in Europe, although France is seeing some better sales from macro accounts against SPGBs and bunds after Japanese Balance of Payments data showed that JPY accounts have been better sellers of France the last month.
Today brings us PPI for data at 8:30 AM ET. Then at 9 AM we will see how Powell will deploy his defense against negative rates, and watch the markets reaction. Where there is smoke…..you better bring a big fire extinguisher sir. Fed will conduct a normal buyback, along with financial ETF purchases again today. Finally we will get the last leg of this week’s quarterly refunding at 1 PM ET as Treasury will issue $22BN in new 30y bonds.
And we haven’t even talked about corporate issuance yet. Another blockbuster day yesterday with $24.75BN in new HG paper, making the week’s total $48.5BN, well on our way to that projected $75BN (or maybe it should be $110???). Today has 10 deals already, with whispers of a jumbo 30y deal (at least $5BN) in the wings, but still no name attached, and haven’t seen what looks like a concession in the market for the extra paper either. We have not built in any further concession for the 30y since that rip of a 10y yesterday. Evidence said it would go well, but it went better than well. Since last night, dollar buying against yen has everyone suspicious that Asian accounts are setting up to get paper at auction again. The other clear item right now is that the shorts got a little too ahead of themselves since May 4 (the day Treasury quarterly borrowing was announced) and now are struggling to cover. The day is still very young, but there is risk of a bullet bid out there. Either way, it will be an interesting day.
As for a range today, it’s dicey for sure and of course most of the tools here say lower rates (it’s just a glass is half empty bond guy mentality!). For choice today in TYM, let’s call the range at 139-17 to 138-30. I will state right now, that won’t be the range. There is reason to look for a 138-14 trade, but offsetting reason to look for 139-27. One of those two will trade today, of that I am certain. Feel very clueless. Market should explode out of here, but in the last 90 minutes, I have gotten no less than 5 extremely bullish write-ups (this tending toward #6). Support comes in at 139-02, the theoretical objective at 138-30, 138-28, 138-22, 138-14, 138-02, 137-28, 137-22. Resistance comes in at 139-05, 139-11+, the 139-17 level, 139-19, 139-27, 140-02 objective, 140-18, 140-24. Key levels in US 30s are 1.30% and 1.375%. Go with break in either (obviously I think that should be buying of 1.30% after the auction).
Good luck out there and stay healthy on this hump day!
mjc