When risk needed a goosing yesterday, the Fed stepped in to update the Secondary Market Corporate Credit Facility (SMCCF if you are so inclined) that made clear the backstop for corporate paper is now in place and running. Not to be outdone, when the market could use a second goosing overnight, story broke that Trump administration was preparing a $1TRN infrastructure stimulus bill (roads, bridges, 5G, rural broadband) to be presented later this week. Make sure you don’t run out of ink for that printing press our kids will pay for. But I digress…. And all this helped the market weather our friends in North Korea bulldozing the Inter-Korean Liaison Office (trying not to chuckle) on the Korean border. As of 8:20, Treasuries are 1-6 bps higher in yield in a bear steepener while equity index futures are 1.75% to 2% higher ahead of the cash open.
Treasuries opened flat and quiet but headed south quickly on some early US deal-related paying in USD 30y swaps, that at least one person offered was related to the upcoming BP deal; pressure on AUD and NZD (huge 4y TAP) also kept buyers at bay in Treasuries. When word leaked out just after Tokyo lunch of the US fiscal stimulus being prepared by administration, there was hedge fund paying in USD 10y swaps, while Asian banks were also better payers in 5y swaps. Hedge funds sold 30s and US classics as somebody has to pay for these stimulus plans, while Japanese asset manager moved in on the curve, selling 10s to buy 3s. After the Korea story hit, the sellers stepped back while there was central bank buying of 10s and 30s, RV purchases in WN contracts, and some levered covering in FV and TY. Volume was solid again during Asia in a choppy session, but got quieter again during Europe. There was better real money receiving in USD 10y and 30y swaps at the outset in London, while banks lifted 5s and 10s. Flows quietly greatly mid-morning in Europe as has been the case for awhile now as the bear steepening holds in early NY trade. Flows have been aggressive to buying gamma in exchange space overnight: 20K TYN 138.5/139.5 call spreads lifted (20/64), ATM TYN 138.5 straddle lifted 1K times as NY arrived for 51/64.
The Asian session saw BOJ leave policy unchanged, but Kuroda’s support for corporate balance sheets (i.e., increased relief program from JPY 75TRN to JPY 110TRN) and talk of lowering YCC for general economy backstopped risk and bear steepened JGBs. Paying in JPY 30y and 40y swaps by domestic accounts added to the steepening pressure. A massive Kiwi 05/24 TAP saw book of 2x issuance as NZD rates rallied hard off early lows after supply. JGB yields were 1.5 bps higher in 10y, but 3.5 higher in long end and flat in front end, while Aussie 10s saw yields jump 5.75 bps and NZD yields halved their early losses to close higher by only 4.5 bps. Asian equities were up anywhere from 1.5% (China mainly) to 5% (NIKKEI) for the major indices.
Steepening was the theme in Europe of course as well. Risk on has helped peripherals outperform to further pressure the core curves. Aggressive macro selling of bund and 10y OAT basis was a theme early in session as well. Bunds found some love mid-morning as European real money lifted bunds and then bobls in decent size after ZEW disappointed, but an uptick in expectations seemed to mitigate a weak current conditions number. Gilts were under pressure early ahead of auctions, but have bounced nicely after the supply. 6y gilt auction could not have been more “average” than it was, while 10y gilt auction was very mixed, sporting a large tail but very good (just not at all aggressive) bidding statistics. There was some buying of 10y gilts against bunds after the supply, while there has been better buying of front end outright and against 5y gilts buy UK macro account all session. European equities are 2.5% to 3.5% (Italy!) better on the rosy risk sentiment.
Today in the US, we will get retail sales at 8:30 AM ET, followed by IP/CU at 9:15, wrapping up with Business Inventories and NAHB at 10 AM. There is no coupon supply today as the docket is clear for Chairman Powell’s testimony before the Senate at 10 AM ET, with Q&A to follow his prepared remarks. Clarida speaks at 4 PM ET to discuss the economic outlook further.
Well, isn’t this so very cute??? That little distribution tail that was nagging us and skewing the numbers yesterday? Yeah, not a tail; it was a signal that certain people (me!) chose to completely mis-appreciate. Argghhh. Although I think it’s fair to say the Fed’s announcement yesterday was not nice ahead of Powell today. But that is the playbook now: Fed wants steeper curve, administration wants cash flowing and people getting paid between now and November, and that can’t be forgotten (yeah, not hard concepts, not sure what I keep missing). Enough. I got a call into the Clue Salesman anyway, but this doesn’t seem as hard as some of us are making it. For choice today in TYU, let’s call the range at 138-23 to 138-07, after an overnight range of 138-20 to 138-09. Fill some single prints, see if BP deal is fully hedged, and see what Powell says. Support below 138-07 comes in at 138-01+, 137-30+, 137-21, 137-15, 137-11; resistance comes in at 138-17, the aforementioned 138-23/24+, 139-00, 139-03+, 139-06+, 139-09, 139-13+.
Have a good Balloon Tuesday and enjoy the stock rally…..I am going back into my cave,