holes in the dam showing up everywhere these days….. (Thursday)

Risk off remains the theme today, igniter being the discord over a stimulus package despite Mnuchin comments late in the trading day yesterday, and then was fueled by RBA sounding the alarm during the Asian session and the continuing move to lockdown in UK. As of 8:20 AM ET, Treasuries are 1-4 bps lower in yield, with the curve bull flattening while US equity index futures trade 1% lower ahead of the data and the cash open.

Equities opened a touch lower but bounced early in the Asian session as Treasuries traded flat. Important to note that Japanese real money was early seller of US 7s and 10s, continuing their recent theme of lightening up, as Treasuries traded slightly lower. However, comments from RBA’s Lowe about further bond buying and rate cuts turned markets to risk off. There was better Asian real money buying of US 10s and 30s, and swaps snapped to life with receiving in USD 10y and 30y swaps, along with USD 5s30s swap flatteners being added.

After Tokyo lunch, Treasuries traded sideways until just before the European open; equities and yields dropped hard on the open in Europe, as the Continent struggles with increased lock downs and division over more fiscal and monetary stimulus in the EZ, not to mention this little BREXIT event that seems to be its usual division this week. Treasuries saw the regular official buying of US 30s and WN contracts shortly after London open, followed by buying of MBS and smaller amount of other spread product. There was good macro buying of US 10y sector intermittently throughout the London morning. Swaps were also active, but in opposition to the Asian theme as there was much better hedge fund paying in USD 5y and 30y sectors, in some cases against receiving in 1y and 2y, along with a macro account adding USD swap 5s30s steepeners. There was better buying of gamma via the exchange, buying of TYZ calls early, TYX puts as NY arrived. Either way, gamma seems to have a bid, at least for the moment.

Asian session was all about the Lowe comments about cutting rates and increasing buybacks; Aussie 10s rallied 8.5 bps at one point, as major dealers are all now calling for a cut in November at the latest. New Zealand bonds were dragged along for the ride, rallying 3.5 bps in Kiwi 10s, while JGBs spent more time watching than participating as yields were flat on the session in 10s, but lower in the long end as the JGB curve bull flattened. Asian equities were down between .5% and 1%, with the exception of the Hang Seng which gave up 2%.

Increased restrictions announced early today for Germany and France helped spur the flight bid for European core fixed income, with peripherals widening (Italy 10y sector is 8 bps wider to bunds this morning) on domestic bank selling of 5y and 10y sectors and buying bobls and bunds. Macro thematic trade has been adding 10s20s flatteners in bund space, while very good demand for Austria 20y supply only further flattened the curve. Spanish 10s and 5s were sold ahead of mixed supply there, while France saw very sluggish 5s, 7s, and 8s and mixed reception for linker supply. The EU rhetoric in the form of demands on UK to compromise on trade added another level of risk off for gilts, and Manchester heading for greater lockdown didn’t help matters, as gilts trade quietly but of course better bid in a flattener.

Today in the US, we get Empire State, claims, import/export prices, and Philly Fed all in a couple of minutes. Monthly Budget Statement is due out at 3 PM ET. Another full day of Fed speakers is due with Bostic speaking now and Kashkari wrapping up the day at 5 PM ET.

For choice today in TYZ, call the range at 139-18 to 139-08. Take out 139-18 and you will be headed for 140-02 at a minimum. Like being long US classic over anything else right now as it looks cheap against the curve and vs cash for now. Don’t be short gamma here, and buying a synthetic call in USZ space seems attractive for the above reasons and ahead of the “Big Bang” event this week. More on this later.

Have a good Thursday,