Ufff, it must be Wednesday, the hump in the middle of this brutally long week. Market opened better to risk after hopeful announcement yesterday from Moderna on vaccine, while news leaking out of similar positive results from AstraZeneca/Oxford vaccine have given risk a second boost this morning. Fixed income holds in much better than expected given the reaction in risk, with pockets of small buyers and lack of sellers really making this hard. And Chinese shares fell on speculation that PBoC is selling equities to tamp asset bubbles as it is growing concerned with potential Wave 2 of the virus. As of 8:15 AM ET, Treasuries are bear steepening, .5 to 2 bps higher in yield, while US equity index futures are trading 1% (NASDAQ) to 2% (DOW) higher ahead of data and the cash open.
Treasuries gapped lower out of the gates last night on the back of the Moderna vaccine story. Then they spent the entire Asian session clawing back the losses. There was small activity in the long end that helped Treasuries recover, with Japanese real money buying 30s, Japanese lifer buying WN ultras, and Asian real money receiving in USD 30y swaps. On the whole though, flows were light. After Tokyo lunch, Asian central bank lifted 2s, 10s, and mortgages small, while Asian banks paid in USD 5y swaps along with selling some spread product, and macro account added 5s30s steepeners in USD swap space. Treasuries benefited from a strong opening in bunds and gilts, continuing to grind higher early in London. There was some small central bank buying of 5s, European macro account buying TY to sell RX contracts, and then a block buyer of 15K TYQ 140 calls for 5/64 at 5:33 AM ET that got us to the highs of the session. As NY arrived, selling picked up in tandem with the reports of Oxford vaccine success, as hedge funds and US portfolios sold 30s and 10s respectively. The curve has bear steepened, with long end through last night’s opening lows. Yes, this market is soooo frustrating.
Asian session was quieter. BOJ, completely as expected, left rates unchanged at their meeting, and added nothing that the market didn’t expect. Maybe the biggest news of the Asian session was talk that PBoC is very concerned about asset bubble in light of spreading Coronavirus and was said to have been a seller of Chinese index product, not that rest of world cared. Shenzhen (-2%) led Chinese indices lower, while rest of Asian bourses rallied, led by 1.6% rally in NIKKEI and 1.9% rally in Australian ASX. Unwinds of hedges against yesterday’s 5y syndication in Australia (way oversubscribed) helped Aussie 10s rally while New Zealand rates struggled when RBNZ skipped QE window again today. JGBs ended .5 bps higher, Kiwi 10s were 1 bps higher, but Aussie 10s were 2.5 bps lower in yield.
Interesting European session began with better bid on unwinds of hedges from yesterday and the sudden disappearance of the programmatic seller in bunds after two days of pounding that sector. Tak of PEPP/PSPP buying also helped bunds rally, with good buying of bobl and bund futures by dealers an early morning focus. EU court ruling that APPL does not have to pay a $14.9BN tax bill to Ireland (that’s a LOT of whiskey!) caused some minor selling in Irish 10s and headline generated some fast money selling of bunds, but everyone realized the ruling will be appealed. There was aggressive concession building ahead of tomorrow’s raft of sovereign supply in Eurozone, while lack of better concession for bund auction left it only okay, with a 1 bps tail and average bidding. The AstraZeneca/Oxford story has weighed more on bunds than Treasuries, as bunds are well off their early highs. Gilts opened better, but got hammered on a simply awful 05/57 gilt auction. There was a 38.6 bps tail (yes, checked it twice!) and very low bid to cover, while 3y auction wasn’t much better (1.8 bps tail and underbidding!). Gilts have led the move lower, with some macro selling of UK 30s to buy German 30s, along with adding UK 2s5s steepeners in cash. Peripherals are mixed, while European equity indices trade 1.5% to 2.5% better on the session.
Today in the US, we get Empire Sate and import/export prices at 8:30 AM ET, followed by IP/CU at 9:15, while we will wrap up with the Beige Book at 2 PM ET. Wake me up when it’s over please. Harker discusses the economy virtually of course at 12 PM ET, while Logan speaks to SIFMA group at 1:30 PM.
Okay, as for this fixed income market…. Equities rallied 1-2% yesterday and are pegged at almost 2% better today, and fixed income refuses to break. One more time, what am I missing here? Most of the signals say lower prices/higher yields. Positioning is the one problem in the long end, but surely it isn’t anywhere near some of its recent extremes. Been getting signals for a break for six consecutive sessions; we don’t rally, but this is NO break. Let’s try this again, calmly this time: for choice today in TYU, let’s call the range at 139-09+ to 138-28, after an overnight range of 139-13 to 139-04+. Here’s the deal: have to test 139-09+ early, fail there and you can take out support at 139-01+ and head for 138-28. Take out 138-28 and it’s hello (FINALLY!), 138-23/23+, below there 138-19, 138-10, 138-01. Now, get above 139-09+ and say hello to 139-14+, what the heck 139-19, maybe even 139-25 and 140-04, at which point I will just start drinking again. Something is not copacetic here and I don’t know what that is!
Have a great and safe hump day either way–and don’t forget to pay Uncle Sam,
mjc