Well, can’t skip writing for a third day just because market is barely registering a pulse, can you? So brutal. And we have the big 10y auction today, so let’s try it. Market trades very mixed on anemic volume and at best moderate participation, lacking any true direction since the beginning of June. There are a couple things to be aware of, and this talk about messing with the CNH/USD peg could get interesting too. Meanwhile, UK announces large tax cuts, stimulus, and “eating out” credit to consumers. Market is unfazed still. As of 8:20 AM ET, Treasuries are .5 to 1.5 bps higher in yield in a bear steepener (that’s a stretch, but what the heck) while US equity index futures have clawed their way to marginal gains ahead of the cash open.
Maybe the most important part of this whole piece is a small sense of what accounts are doing. So in Asia, Japanese real money sold 10s, as they have done since Friday, but skipped on selling mortgages for the first time in three days. Instead, regional Japanese banks were the sellers of mortgages in smaller size. As usual, after Tokyo lunch, Asian central banks lifted some mortgages; today they also bought US ultras and 30s, shifting from the intermediates, largely 10s, they had been buying the last week ahead of today’s 10y reopening. US hedge funds were better sellers of 10s small, but were better sellers of TY contracts throughout the session, largely selling upticks in what is widely considered a set-up for today’s supply. Again, none of the above was very large, but has been consistent with what those various account types have been doing for the last week and worth noting on the (very) off chance we actually move at some point.
Volume was actually slightly better in swaps, but really lacked any true direction. There was decent Asian bank interest to pay in USD 10y swaps after Tokyo lunch, a large receiver in the belly of a 10y/12y/15y USD swap fly, while during London there was better interest in USD 2s30s and 15s30s swap steepeners after some early UK macro paying in USD 20y swaps. Treasuries and futures have traded fairly quiet in London, with some RV selling of 10s, macro adding 5s10s and FV/TY (so 5s7s) steepeners as well ahead of the supply. When NY arrived, the selling picked up very small with better dealer and RV effort to build in concession for today. After being mixed, curve now working toward uniform steepening ahead of 10y and tomorrow’s 30y supply events.
Locally, the Asian session saw good demand for JGB 20y by several account types as apparently the carry trade in JPY has come back into vogue this week; JGB 20s closed 2 bps lower in yield on the demand today. AOFM tapped 5/30 issue to strong bidding (.4 bps through) and decent demand, largely replicating May’s results for the same tenor. Early move through 7-handle in CNH quickly faded, and then the story about Trump considering messing with the CNH peg hit the tapes to jack with risk trade. Yields for JGB, AUD, and NZD 10y sector were all .5 bps lower, that’s how boring this really is! Asian equities were mixed, with NIKKEI down .8%, China up by roughly 1.5% across various indices, but Hang Seng only up .6%, with rest of Asia mixed.
European session frankly has been very boring. Chancellor of the Exchequer Rishi Sunak delivered what the government called a “summer economic update” at 7:30 AM ET; talk was that there would be more stimulus announced, and he didn’t fail to deliver. A number of credits and novel initiatives in stimulus were announced. Markets were fairly ready for it, with little impact thus far. Gilts continue to find support from real money, lifers and UK banks, as has been the case all week. There was a mild pop to gilts after Sunak’s speech. FTSE continues to struggle, uninspired so far by the increased stimulus. Announcement by Daimler that June car sales are trending above estimate (oh boy) helped underpin risk early, but world is too mixed for a legitimate thematic trade and European risk has given back early move. Something that no one has identified caused volume to surge in bunds mid-morning as RXU and IKU (BTPs) led move higher on good volume, with best explanation being PEPP/PSPP buying-related flows. Financials are struggling most in Europe, something US will have to be mindful of today as well. Very average German 5y bobl issuance left market very bored. Interesting to see German curve flattening and outperforming globe slightly on better demand for buxl and cash 30y, while peripherals struggle to keep pace. European equities were mixed but have all taken a leg lower in the last hour.
The best we can do for a calendar today is the consumer credit data at 3 PM ET. Similarly, we can look forward to one Fed speaker officially on the docket, as Bostic does an “economy” webinar at 12:15 PM ET. Fear not, we always have Treasury issuing debt, today being the second leg of this week’s note issuance, with $29BN of reopned 10y notes due at 1 PM ET.
So we trade the current levels like a magnet in rate space. No wonder vol is getting taken out to the woodshed. Every hedge fund manager and all his family are short the ATM straddles and long whichever wing they think we are trading too, hence all the last two month’s continued relative strength of both skews. No reason to abandon this position, no pressure but jeez no money to make. Customer inquiries are getting fewer and fewer as well. TY Week 2 139.25 straddle is 20/22 here (139-05 in TYU). I say you have pay 22/64 for the straddle. May be able to buy it cheaper later today, but jeez, don’t you have to own something at these relative vol levels? This is either a fantastic coil or a market that is about to shut down for the year. How can that be?
For choice today in TYU, call the range at 139-08 to 138-23, with a range thus far of 139-09 to 139-04. I will add that there is zero (!!) conviction on this, as signals are split between taking out 139-12 and 138-23, but one of them comes out by tomorrow morning. Support in TYU comes in at 139-01, 138-28, the 138-23 objective, 138-19, 138-10, 138-01, 137-27, 137-21; resistance comes in at the 139-08 level, more important 139-12/12+ level, 139-16, 139-25.
All right, enough for this hump day…have a great and safe summer Wednesday,