Gee, take a day off and come back to everyone seemingly even more bullish on global fixed income. Go figure; that said, volume today remains lighter in general, continuing the trend of this week. Soft inflation data out of Australia was the catalyst last night, as fixed income enjoys another solid performance thus far, and getting close to flipping some longer-term technicals. As of 8:20 AM ET, Treasuries were 2.5 to 3 bps lower in yield led by the front end, while US equity futures were basically flat ahead of the cash open.

As noted, the highlight of the Asian session was the soft Aussie inflation data, resulting in a 16 bps rally in less-liquid Aussie 2y bills, but a stealth performance for 3y and 10y bills as well, eventually resulting in a small steepener in Aussie debt along with better bid to front end of Treasury curve in sympathy. Hedge funds used the early bid in the front end to sell 2s and 5s, but Asian real money was better axed to buy US 5s and 10s, along with receiving outright and on the curve in USD 10y swaps. Locally, with focus on Australia and to a lesser extend on New Zealand (NZD two year swaps rallied 4 bps), Japanese fixed income was much quieter ahead of the impending week-long Golden Week holiday. JGB 10s rallied 1.5 bps, with front end outperforming slightly while JPY swaps tightened slightly to JGBs. There was small insurer buying of JGB 20s and some bank selling of JGB 10s, in an otherwise nondescript session for Tokyo. Asian stocks were mixed, with China small better on the session while NIKKEI was off marginally. ASX led rest of Asian commodity-based economies higher on the rate cut speculation, rallying 1%.

The European open saw Treasuries trade sideways while bunds were under early pressure ahead of bund and Italian supply, including a 10K lot block sale in RXM9. Dealers sold bunds, while RV accounts sold bunds but bought schatz against Italian 2s ahead of the supply there. Any weakness in Euro rates disappeared though with the release of soft German IFO data, as macro account bought softer bunds both outright and against TYM contracts. A block sale of 3272 TYM9 for 123-09 at 3:30 AM ET ($250K in DV01) barely pressured Treasuries, as any pullback this morning is met by better bidding. Even a weak bund auction was met with better buying mid-morning in Europe as market focuses on soft data and perceived global need for fixed income. Italian 2y auction went fine, but 14-year linker was very soft. Mid-morning, deal-related buying materialized in bunds, while European real money lifted longer end of the bund curve, helping to flatten that curve and supporting long end in Treasuries. Long end of Treasury curve has retraced some of its underperformance since just after the bund auction, with RV accounts buying 10s against 5s (supply today) and macro accounts lifting 30s outright, as US 5s30s has flattened 1.5 bps since just before NY arrived although still .75 bps steeper since 3 PM marks yesterday. There has been some minor levered selling of 10s ahead of the Chicago open but flows remain muted.

Today’s calendar is barren, with the only release of the day having already occurred (Mortgage Apps at 7 AM ET, not that anyone cares) and the Fed in blackout period ahead of next week’s meeting. Fortunately, we do get $20BN of 2Y FRN at 11:30 AM ET and then a second course of $41BN in new 5y notes at 1 PM.

Well, what a tangled web we are weaving. For those of us who missed yesterday, OI in the EDU9 contract jumped 36K contracts on Monday (with EDZ9 up 17K). I only mention this because EDU9 led the funding curve higher on Monday, rallying 3 bps, and leaving many people very confused. Turns out that a private forecasting service some hedge funds use had made the case for a Fed rate cut, potentially as early as next week, in an effort to supercharge inflation, the thought being to protect themselves in case Europe really does drag global growth lower. Turns out to be a good trade: if the Fed does nothing between now and September, you would have made 3 bps with only a 1-2 bps of risk ahead of Q3 end, while a cut could generate you an extra 25 bps. The purpose of that story, aside from better understanding of Monday’s only trade, is to highlight the amount of play dovish ideas are getting. Bottom line, we are back to picking at that structural short scab…. month end ahead, everyone is already talking about extensions (currently .07 years in Ts, nothing huge) and rebalancing (this one is huge given the move in equities). Also from my day off, saw a nice cheat sheet on the number (5 and counting) of Japanese lifers who plan to increase purchases of foreign bonds, mostly unhedged (!!!!), during this fiscal year, which remember is not even a month old in Japan. You get the idea???

For choice today in TYM, let’s call the range at 123-17+ to 123-03+. 123-17+ would fill the single prints from back April 12 that we have been highlighting since middle of last week. Take that out, and you should test 123-21+ (daily pivot high), then 123-29. On the downside, you should not get through 123-09 today, or it could get ugly (okay for a few hours only, but still). Support is at today’s low (123-03+) and the daily pivot (123-02+). If you somehow take that out, watch 122-30+. Exchange vol is still too expensive, which is why there has better asset manager buying of conditional bull structures in swaptions; that case is even stronger if you believe any of this Fed cutting chatter (see? I avoided the word “silliness”). Oh well, enough for now.

Have a good hump day,

mjc