Hong Kong quiet yet CNY troubling, but risk on for now as EC delivers(Wednesday)

Another day, another risk on trade. Things are so great, I can’t find enough sunscreen right now to go with my shades, but I digress. Traded sideways in Asia with a nervous eye on Hong Kong, but risk caught a bid after European open on speculation of more ECB rescue measures. Treasuries flat lined through Asia before coming under pressure just before US arrived on leaks around the new ECB loan/grant plan. Volume and activity have been mediocre at best, with futures volume artificially inflated by very active calendar rolls ahead of First Notice Day. As of 8:30 AM ET, Treasuries are 1- 1.5 bps higher in yield as the curve steepens further, while US equity index futures are mixed, 1% higher in DOW, slightly less in eminis, and roughly flat in NASDAQ.

Asian session saw Hang Seng open down 1% on concern over Hong Kong, but with no new rhetoric out of China and US and no violence in streets the index rallied as the night wore on. Treasury volumes were light, with US Fixed Income markets stuck in 1.5 bps range right through the session. There was Asian real money buying of 30s outright and Japanese lifer adding of WN contracts that helped flatten the curve slightly ahead of month end, as did Asian real money receiving in USD 3y and 10y swaps. There was small two-way flow in the front end, with central bank buying of 2s and Asian bank paying in USD 2y swaps.

Europe saw Treasuries tick slightly higher on small risk off move early in the session, again without any volume or real participation. However, leaked details of the EU Commission plan to add another EUR 750BN of stimulus via 500BN in grants and 250BN in loans, helped risk catch a bid in Europe and pressure Treasuries. There was early paying in USD 10y swaps in Europe, but also some Asian month end adjustments that saw USD 10s30s swap curve flatteners go through mid-morning in Europe. Treasuries came under pressure with bunds on the EC deal, and then pressure on the curve as NY walked through. There has been very good selling in WN contracts since 7 AM ET, as hedge funds look to deleverage ahead of month end and got a deal with the Asian buying that richened the very long sector overnight. Hedge funds have been selling 10s and paying in USD 10y swaps in the last two hours as well.

Asia saw good demand for AOFM 10y tap, well bid and stopped .4 bps through, but when both RBA and RBNZ passed at normal QE buying times, both rates markets came under mild pressure. Japan traded quietly waiting on final details of new Japanese stimulus package, closing flat on the session, while Aussie 10s backed up .5 bps and Kiwi 10s backed up 2.5 bps. Hang Seng managed to close down only .4%, with Chinese indices off likewise, while NIKKEI rallied .7%.

Europe was all about the EC package and large supply out of France. After being underpinned most of the session on the huge book for the French 20y syndicated deal (over EUR 58BN for the deal), the stimulus package eventually cracked bunds, as hedge funds (outright) and RV accounts (against OATs and then against SPGBs) took bunds out to the woodshed for a second day in a row. Gilts were enjoying a decent day until bunds and Ts pulled them lower; there has been better interest by RV community to receive in GBP 10y swaps against paying USD 10y swaps (seasonal trade) and buy gilts against bunds. Data was a nonevent thus far today.

Today we will get Richmond Fed at 10 AM ET, followed by the Beige Book at 2 PM ET. In between those two events, we will get the second leg of this week’s note refunding, with Treasury issuing $20BN in reopened 2y FRN at 11:30 AM ET followed by the (record sized) $45BN new 5y paper at 1 PM ET. Come hungry and leave full…. Bullard discusses the economy at 12:30 PM ET, while Bostic will do likewise at 3 PM ET. People are paying more attention to month end extensions and we are starting to hear about rebalancing. Barclays revised their extensions overnight, now looking for an outsized .14 year additions in USTs and credit, .7 years in mortgages, .8 yr extension in EU Treasuries, -.1 years in Sterling Treasuries, and no change for Japanese Treasuries. Rebalancing should theoretically see a nice move out of equities and into bonds, but you know my view on that voodoo magic…

I am so tired of this market, and while I have every hope of getting a move, just don’t see it. Specs are not that short here, but money managers aren’t that long….specs are very short stock indices though and it shows. Does it ever! Month end extensions and rebalancing flows should be supportive of Treasuries, but for now not sure that does anything other than take us back toward low end of the recent yield range. Treasuries stay confined to this 25 bps range (.54% to .78% in cash 10s) that we have floundered in since April 1st, and there isn’t exactly a reason to see that change for now. Sorry to be so pessimistic. I called the Clue Salesman, but he is quarantined and can’t help me for now. Guess the guys pounding Treasury vol on the upticks (i.e., every time we move 5 or so bps on a false breakout) are the smart ones, because that’s never gone wrong before. So for choice today in TYM, let’s call the range at 139-04 to 138-20+, after an overnight range of 139-03+ to 138-22. Look for early pressure as set up for 5y but look for Treasuries to find support later in day. Support comes in at 138-22, the aforementioned 138-20+, 138-14+, 138-11, 138-02, 137-28; resistance comes in at 139-00+, the 139-04 level, 139-11, 139-15+, 139-19, 139-27. It really feels like we are owed at 138-14+ trade in TYM, but I have not understood things for weeks.

Have a good hump day….