heading into the home stretch of 2018….(Thursday)

Markets are retracing 1/3 of yesterday’s power risk on move, with negative banter out of China and position adjustments being blamed for the pullback in risk. Equity futures have retraced roughly 30% of yesterday’s gains, down 1.25-1.5% while Treasuries are 1.75 to 2.5 bps lower in yield from 3 PM yesterday, with volumes and activity remaining light.

On the periphery, people continue to dismiss the funding/credit events that have driven Chinese and US issues more than it has thus far received credit for engineering over the last two weeks, instead fixating on tariffs, trade and US domestic politics. Chinese shares were the only negative performers in Asia overnight after offshore lending rates rose again; European bourses are under minor pressure as well since China stumbled. Flows as expected have been light. Interesting that fixed income has recovered some of yesterday’s losses, but seems much more orderly the last 24 hours than other asset classes. A block buyer of $716K in DV01 for the 7y sector came through at 3:25 AM ET, with the purchase of 9589 TYH9 at 121-09+. Other than that, there was some early Asian real money buying for month end into the European open; with the risk off sentiment ticking up at the same time, we saw some hedge fund covering in cash 10s and US classic contracts. RV account sold 7s on the curve against 10s just as NY arrived, but other than that it has been pretty boring as one would expect during the holiday season.

Ticking a few boxes on the holiday calendar here:

*Claims at 8:30 AM ET like usual;

*HPI at 9 AM;

*Consumer Confidence at 10 AM ET;

*the first casualty of the shutdown will be today’s now delayed release of new home sales by Commerce Department, with no rescheduled data as of now;

*big event of the day is $32BN in new 7y paper to be auctioned at 1 PM ET, wrapping up the year’s auction cycle in Treasuries. We will also get $40BN in 4W bills and the newer $30BN of 8W bills that may cause a little indigestion, especially if we continue to see risk off mentality early today.

As for month end extensions, Treasuries are set to extend .06 years, which matches agencies, credit, and MBS as well this month. TIPS contract .04 years in real terms. There is also much being written about the size of this month’s pension rebalance, speculation of a number approaching $60BN that needs to move from fixed income to equities by some estimates, although that number will be trimmed slightly after yesterday’s 4+% rally in major US indices.

Today will be all about funding over the turn again; if it shows up early, then risk will stabilize and we’ll proceed with rebalancing year end activity that was largely behind yesterday’s rally. If the 4-week bill and 8-week bill stumble at auction, it will be a clear sign that positions won’t be funded and risk will be led lower by the NASDAQ and commodities, the two most exposed levered vehicles in the risk basket. Don’t forget the 7y for more signs into New Year’s Eve; after the 2s and 5s both tailed badly (1.9 and 2.3 bps tails respectively), there will be some consternation around 7s, but this should be somewhat dented by their appeal as cheap month end extension vehicles.

Have a good Thursday, and if we don’t speak, I wish you and yours a most Happy and Prosperous New Year!