New highs in stocks, multi-year highs in yields has everyone watching the markets now, with Treasury yields and Fed-speak the topic of choice since yesterday afternoon, even though the Fed couldn’t be clearer over the course of this week as EVERY speaker has delivered the same message. Activity in Treasuries is brisk with volume running over 3 times average overnight. That pattern continues this morning: as of 8 AM ET, Treasury yields were 3.5 to 4.5 bps higher, with curve steepening again while equity futures were creeping lower but still only marginally worse.

The Asian session saw early US real money selling in cash 10s and US classic contracts, a player that used to participate on the Asian open regularly but one we haven’t seen in quite a long time. A weak open in Australia, gapping 10 bps higher in yield, added further pressure on Treasuries before some hedge fund buying of 5s and small Asian real money buying of 7s helped to steady the market through Tokyo lunch. Just before the London hand off, the quiet ended with a block buyer of 20K TYX (November) 117.5 puts (for 27/64 at 12:38 AM ET), the equivalent of selling 8500 TYZ futures as 10y yields broke 3.2% finally just as London walked through the door. Meanwhile, Aussie 10s gapped 9.5 bps higher in yield after yesterday’s performance in the US, but then largely traded sideways for the rest of the session. JGBs also came under pressure, breaching the key BoJ purchase level of .15% before finding some support. Asian stocks were under minor pressure with the higher rates, as US equity futures were slightly lower throughout the evening; NIKKEI was down .5%, rest of Asia not on holiday (i.e., China) was down 1-2% on currency and rate issues stemming from the moves in the US.

The early European session saw bunds and gilts both gap lower, with pressure remaining on the markets after the repricing on the open. Supply across the continent kept a lid on any effort to bounce in Europe, more talk of Italy meeting its budget goals (oh, that makes me laugh every time I say it), and more put buying in Treasury futures all weighed on European core FI. There was a bounce mid-morning in Europe post the Spanish and French supply: Spain’s 3s, 5s, and 10s were a little sloppy in the long end but France’s 10s, 16s, and 30s all met with better demand and fair bidding. That bounce was short-lived after a very sloppy UK 5y gilt auction that found weak bidding and tailed sharply. Volume throughout the European session remained robust. Early flows were hedge fund selling of US 10s, a macro account doing 2/10s flattener (stop out?), Asian real money buying of US 5s and 7s just before Spanish and French supply, but once supply was out of the way the activity turned back to better selling by real money account in US 5s, macro account in Eurodollar whites, and a block seller of $820K in 5y DV01 with the sale of 17,749 FVZ8 for 111-31+ just as NY was arriving. Since NY arrived, flows have become more two-way, even a bit quieter ahead of the Chicago and equity opens.

Today’s calendar is fairly large, but crowded with data that will likely be ignored: claims at 8:30 AM ET, Consumer comfort at 9:45, Factory orders and durable goods at 10 AM. Quarles speaks again today, this time at 9:15 AM ET on “trends in community banking.” In the shadows, we will get the composition of next week’s long end supply in Treasuries as well (expected $36BN new 3s, $23BN reopened 10s, and $15BN reopened 30s).

So we are through last Spring’s high yields as this week’s carnage continues. The TY straddle for tomorrow traded at 6.5 bps this morning after the put buying in TYX, much higher than it’s traded for an employment report in months. We’ll see how the FOA looks later today, but that’s a juicy chunk of change to collect on a sale. There is a lot of noise, a lot of speculation that “convexity accounts” are active, etc. I think it’s a bit simpler than that: the Fed sees a chance to support what many analysts had suspected was a shaky point in the recovery. The Fed’s story hasn’t changed since last week, but merely been tweaked to highlight the positive via the backdoor talk of higher risk free rate, “tailwinds,” and economic growth; it’s just a different way of delivering the message but one the shorts have used well for now. You also have China out for a holiday that impacts volumes on the edges; meanwhile, supply concession building has been behind more of this trade than many people imagine along with this being a very poor period for seasonals. Convexity accounts have not been NEARLY as active as people write though; REITs have been active, but have kept their fire concentrated to the belly for now. So end of day, short for now and selling of an uptick tomorrow is the right modus operandi into supply. As for levels today in TYZ, let’s call the range 117-18 to 118-03+. Support comes in at 117-24+, 117-18, 117-11, 116-30+; resistance comes in at 117-29+, 118-00 (yesterday’s low), 118-03+, 118-10, 118-21+.

That will do it for this dreary Thursday….

mjc