Today has been all about largely reversing yesterday’s move in both equities and rates, with the interesting exception being the continuing painful flattening of yield curves. Flows in the US and Europe have been all about the grab for long-dated instruments, thanks largely to underfunded pensions in the UK, need for duration in Eurozone, and grab for any yield in USD. There have been at least three distinct points of stop outs in curve or long end, with activity in swaps being very large, especially since US arrived. As of 8:15 AM, Treasury yields are 7-13 bps lower in a dramatic flattening, while US equity index futures are have reversed all of yesterday’s gains ahead of the cash open.
The Asian session opened with Treasuries matching their 5 PM marks from the US day, 1.5 bps worse than the 3 PM settlements. There was early Japanese real money buying of US 2s and 3s, which underpinned the front end momentarily, but when Asian real money began using the minor steepening to unwind 5s30s, it forced levered accounts to also unwind 2s10s and 5s30s steepeners. And the die was cast. There was Japanese insurer receiving in USD 10y swaps, along with outright buying of US 30s as well. When China set the CNY at 7.0312 vs expecations of 7.041 and against yesterday’s 7.0326, there was a (very) brief bounce for risk, but soft Chinese data (IP weakest in a decade, retail sales missed badly) took care of that problem. Asian equities and indices started strongly but faded as the session wore on, barely managing to squeak out gains between .1% (Hang Seng) and 1% (NIKKEI). JGBs were under pressure throughout the session, led by bank selling of JGB 20s, but eventually finding enough support from Treasuries to close only 1 bp higher in 10y space. Some hangover after a decent Aussie 10y issue resulted in that sector closing 2.4 bps higher in yield. Activity was tamer after Tokyo lunch but the flattening remained a key theme.
Almost from the outset in Europe, domestic real money accounts there began unwinding FV/TY and FV/US flatteners, while central banks began selling cash 2s as further flattening pressure across the Treasury curve built. Long-dated gilts were also bid as the worst kept secret in the world is the sheer size of underhedged pension funds in the UK. Long-end of the German curve found support from deal-related buying along with receiving in EUR 30y swaps, both outright and on the curve against EUR 10y. RV accounts bought buxl against 30y gilts and Treasuries, but by mid-morning in Europe, Treasuries became the driver. It is clear that the stars are aligning to force money managers to make tough decisions that involve abandoning trades that should work in favor of trades that protect against end of the world as we know it (all right, maybe a bit over the top but people sure are scared). Even though German GDP for Q2 was in line with expectations, the -.1% number only highlighted the malaise in Eurozone growth. European equities have caught the cold and are trading down 1.5 to 2% across the board. As NY walked through the door, there was money manager receiving in good size in USD 30y swaps outright, with levered accounts then getting stopped out on the curve, forcing 10y yields through 2y yields for the first time since 2007.
Today’s calendar includes import prices/export prices at 8:30 AM ET. There are no appearances or other events on the docket as of now, so the market is free to keep looking for more position tinder to burn.
Okay, let’s start out with an apology. Maybe it’s because I have been away so much, but totally misread the signal yesterday: it was clear we were due a move, but for some insane reason I ignored the obvious and went with the arcane. Wrong! We got the magnitude right, just 100% the wrong way. Let’s try again today, which amazingly, yields us the same predictive range in TYU as yesterday: 130-22 to 130-04+, the latter filling a single print gap from overnight (129-21 is the low overnight, there is zero chance we see that print again today). It feels like the pain of overnight will continue throughout the day; this won’t be very fun. Look for more spread compression, some “sky is falling” buying in the long end with 10s through 2s now, and more stop outs on the curve, maybe with Treasuries playing catch up to the work done in swaps overnight. As for support in TYU, watch 130-10, the aforementioned 130-04+ single print gap, 129-31, 129-24+, 129-15, 129-12+; resistance comes in at 130-16/16+, 130-23, 130-27+, 130-31.
Be careful out there today….
mjc