interesting but orderly night for cash/swaps, boring for futures….(Tuesday)

Even though volume numbers were decent in cash and swaps, the optical good volume in Treasury futures was completely the result of quarterly rolls, switching from the September contract to the December contract before First Notice Day this Friday. Markets have traded orderly with the return of London from the Summer Banking Holiday, with a slight bias to adding some duration and some exposure to rates for real money accounts, possibly related to month end. As of 8:30 AM ET, Treasuries are 1.5 to 4.5 bps lower in a bull flattening, while US equity index futures are marginally firmer ahead of the cash open.

The Asian session saw Treasuries open better bid, continuing the theme from late Monday in NY. There was nothing massive about the move, as Treasuries opened the Asian session 1-1.5 bps lower in yield with a slight steepening bias to the curve on the back of some Japanese bank selling of 10s early in the session, while macro account received in small amount of USD 2y swaps. However, that quickly reversed once Asian real money accounts lifted 10s, received in USD 10y and 30y swaps and added a few US classic contracts to boot. That buying from a number of clients in that sector took US rates to their best levels of the night where they flat-lined through the European open. There was one pullback for rates mid-session in Asia when PBoC surprised the market slightly by setting the Yuan at 7.081 as opposed to expected 7.1014. Flows in the Tokyo afternoon saw central bank buying of 5s and 7s, but Asian bank interest to pay in USD 5y and 10y swaps, along with RV selling of 2s against 3s and 5s. JGBs backed up 2 bps on the session after yesterday’s normalization of rates in the US (how’s that euphemism?), while Aussie rates backed up 3 bps and New Zealand rates came off 3.75 bps for the same reason. Domestic flows in Asia were nondescript, largely dealing with supply concerns in Australia and Japan, but there is a lot of talk making the rounds about currency-driven switches after month end from Treasuries into local sovereigns (yeah, I’ll fade that right now!). Equities had a quiet session with Hang Seng under continued pressure (flat), while rest of Asian indices rallied between .5% and 1.9%, with Shenzhen the leader and NIKKEI adding 1%.

Treasuries went bid with gilts leading the way after the European open as LDI accounts lifted long-dated gilts out of the chute. As quickly as the buying dried up after the open, gilts backed up 20 tics and the market settled into a range. We have been stuck in a 2 bps range since shortly after the European open, bouncing from end to end repeatedly without ability to break out. The .12 extension this month for Treasuries (in line with average for August, given the quarterly refundings, but still .12 of duration that needs to be added) was likely behind the buying of 10s and 30s by Asian and UK real money accounts on any pullbacks in Treasuries; receiving interest in USD 10y swaps was on behalf of RV accounts. RV accounts were also sellers of 2s ahead of supply today, but more cautiously after getting torched in illiquid GC market last night. A couple Chinese headlines mid-morning in Europe caused some minor risk off, with levered buying of 5s and TY contracts. Early in the European session, there was a buyer of 5K TYV 134/135 call spreads for 5/64, and just before NY arrived there was a block trade buyer of $1.16MM of DV01 in WNZ9 (+3143 WNZ9 for 196-21 at 5:09 AM ET). Gilts saw renewed LDI buying around noon in London that helped support Treasury curve as well. German Q2 GDP was soft yet again, but France delivered slightly better consumer confidence figures; the data was largely a wash for Eurozone. After the data, bunds caught a bid as apparent month end buying materialized in bunds and buxl (I love quoting the buxl with a 222-handle) after the soft German data. 2s are trading very special into the day ahead of supply as well. Risk is mixed, honestly just watching Italy (coalition building) and China, with European equity indices mixed to flat.

Today’s calendar brings HPI data at 9 AM ET, with Richmond Fed and consumer confidence at 10 AM. Consumer confidence is all that matters before we kick off the end of the quarterly refunding month with $40BN in new 2y notes at 1 PM ET. As of now, it’s all about the tweets as there are no speakers or appearances on the calendar.

Well, we stayed in that tight range that the numbers predicted yesterday; there are a number of indicators that point to us remaining in that range again today. It would seem the risk is to the upside here, but it is balloon Tuesday (please, I am actually being serious) and there are a couple signals that say 5s and 30s are overbought on a very short-term chart. So for choice today, call the range in TYU at 131-07 to 130-23+, which is 1/32 lower on the downside than yesterday. Take out 131-07, and it gets very ugly very fast today, with a quick run to resistance at 131-11, 131-14, 131-19+ and 131-29+. Remember, yesterday’s high at 131-19+ has less than a 5% chance of NOT being taken out in the next week, just seems a bit too early to take out today. If by chance no one (hear that Master Tweeter) derails the balloon, stocks could put in a good day and we could see Treasuries take out yesterday’s low at 130-24. If we take out 130-23+ could make the case for a move to 130-09+ before we base, with support before there at 130-15+/14+. Below 130-09+, support comes in at 129-27+, 129-24+, 129-14+. Vol didn’t exactly cheapen, so let’s see if that can happen on a nice retracement Tuesday and present an opportunity to add a little conditional protection, especially if we can back up to that 130-09+ level (1.60% 10y equivalent).

Have a great Tuesday,