We kicked a week of large global supply off quietly enough, as one would expect. Global rates under pressure ahead of the large issuance this week, with equities stumbling after trading better last night. Equities are being pressured by news reports that Chinese officials are unhappy about the attitude of US officials toward their country and may be looking to hold up or renegotiate Phase 1 deal. Oh boy. As of 8:20 AM ET, Treasuries are steeper again, with US 30s up 1 bps in yield but belly down 1.5 bps, while US equity index futures are roughly 1% lower on the back of the China/US tensions.
The Treasury trade has returned to pathetic stage to start the week. With Treasury’s refunding kicking off today, fixed income opened flat but quickly bear steepened as we took out Friday’s lows. Flows were light to say the least in Treasuries and futures, however there was better Japanese bank paying in USD 10y swaps, with RV types selling US 10s and 30s. There was an Asian real money account that paid in USD 30y swaps, before Asian banks were better to sell 5s outright in Treasuries and add USD swap 5s10s flatteners while also receiving in 10s outright. Futures flows were light at best, with only CTA selling of US classics and TY on the break of Friday’s lows.
The European session saw little uptick in USD activity. Treasuries followed bunds lower, with deal-related selling in US 10s and USM classics continuing. RV account sold 3s10s30s butterfly shortly after the European open that pressed curve further. By mid-morning in Europe, equities ran out of steam and headed south, helping to underpin Treasuries. Central bank has been a steady but light buyer of US 2s throughout the session, outright and against 3s. European real money account has sold 10s to buy bills and 2s as well.
The big news this week is all about supply. The early estimate for US corporate HG this week stands at roughly $75BN (a record for “estimates” I am told), with caution that we could shatter the record from just the other week, if we see even close to the level of recent “drive by” deals. And already Disney has announced a 6-part deal at the top of the hour. Add to that big corporate supply in Eurozone and sizable issuance from Treasury, MoF, AOFM, several peripherals and you get the idea. Dollar rallied smartly against the yen on Friday, speculation being that it was Japanese accounts pre-hedging their currency risk to take down the US supply this week. There is also a lot of talk early this week about signals the the GPIF is preparing to put their cash to work at this refunding. We’ll see.
In Asia, the JGB buyback in the long end was a clear signal that accounts were setting up for tomorrow’s 10y supply and three more auctions in the next week for 20s, 30s, and 40s. Meanwhile, the impending Aussie 10y syndication weighed mightily on AUD long end. JGB yields closed 1 bp higher, while NZD yields were 1.5 bps higher; however, AUD yields were 7 bps higher as the 3s10s curve there steepened 6 bps. Data and news were negligible during the session. Asian stocks were mixed, with NIKKEI ASX up over 1%, China down small change, and the rest of Asia mixed.
Europe saw good BTP buying from the outset on Italy managing to avoid a downgrade to junk status on Friday and talk of getting past the German Court decisions (ECB’s Schnabel said EU was steadfast in its ability to institute policy) that could imperil a rescue for the continent. At one point, BTPs were 4 bps tighter to bunds, before an awful (even by Italian standards) IP report, 28.4% decline versus a scary on it’s own -20% estimate, took the winds out of BTP sails, as they are now only 1 bps tighter to bunds. There was good macro selling of bunds to buy BTPs on the open, heavy deal-related selling in bunds and buxl, with paying in EUR 10y and 20y swaps. Central banks have bought bunds off the lows, but volume remains light in Europe as well. After its holiday on Friday, UK returned to what seems like another holiday, with volume horrible and gilts seemingly following bunds, as Boris Johnson looks to reopen UK and supply there grows as well.
Today’s US calendar is empty save the beginning of our official Treasury supply as $42BN in new 3s will be auctioned at 1 PM ET. The only speaker as of now is Bostic at noon ET, but the calendar heats up tomorrow (5 speakers) and then Powell under the gun on Weds morning (9 AM ET).
The risk off sentiment that is creeping through the market this morning on the back of the China comments has flipped risk in the last few hours and made this really hard. Let’s see if we get something that backs us off these levels. Market should chop around here, bid on risk headlines, offered on supply. Sure seems like the big accounts in Japan are setting up to take down US supply. They likely will skip the 3y but let’s see who shows up tomorrow. As for today in TYM, for choice let’s call the range at 139-04 to 138-25, after a range thus far of 139-00 to 138-23. Take out 138-25 and we are headed for 138-11+, if not all the way to 138-02. Below there, support comes in at 137-28, 137-22, 137-16. Resistance comes in at 139-02, the 139-04 objective, 139-11+, 139-16+, 139-19, 139-27. Take out 139-11+ on the upside and you’ll have to wake me up because that would mean something.
Have a good and healthy start to the week,
mjc