JGB traders up the ante, global rates under growing pressure (Wednesday)

Running late so keeping it short today…. Global fixed income markets in Asia and Europe have been under good pressure all night, dragging US futures lower, as markets are clearly getting ready to test central banker efforts to normalize rates, especially in Japan.

Treasuries actually opened to better buyers last night, keeping with the pattern over the last 18 months of Japanese and a few other Asian real money accounts having the ability to add their month end on the first day of the new month. Good buying from real money was seen in US 10s, USU contracts, and US 30s as Japan got going. However, the bid was short lived, as JGBs were literally taken out to the woodshed, with aggressive hedge fund and eventually CTA selling on the break lower. JGB 10y yields jumped over 5 bps on the session, with JBU8 futures down 84 sen, their largest single day move in two years. In case anyone was wondering, repo pressure completely disappeared in JGBs, the clearest sign ever that the last shorts were squeezed out in that rally post-BoJ. JSCC actually took the aggressive action of raising margins on JGBs given the volatility over the last two sessions, only adding to the pressure on bad longs. Aussie rates backed up 5 bps as well in sympathy in what was a bloody affair in Asia. Asian stocks were mixed, with currencies weighing on Chinese shares as they closed down between 1.8% and 2%, while rest of Asian bourses were slightly better but nothing to write home about.

The pressure on fixed income continued through the European open, although US rates traded sideways through the European open after having repriced lower during Asia. It didn’t take much to get RV accounts selling bunds ahead of supply in that sector first thing in the morning, joined in by hedge funds selling both bunds and gilts. Bunds came under further pressure when a macro account paid in EUR 5y swaps to receive cross-currency in USD 5y swaps, while gilts were pressured ahead of tomorrow’s BoE expected hike. Soft to outright weak PMIs across Europe did nothing to stop the selling pressure, as belly of gilt curve took control, with ultra gilts being bought against 5y and 10y sector of gilt curve by aggressive RV community. Weak pricing, despite decent demand, spelled another downturn for bunds after the results hit, with a real money seller of schatz adding to the pressure as bunds backed up 4 bps and gilts were 4.5 bps worse in 10y space. With US finally being dragged back to yesterday’s lows as NY walked through the door, some CTA selling in FVU and USU contracts, along with a bank paying in USD 5y swaps has taken us closer to Tuesday’s lows ahead of ADP report. Equities are mixed, Europe lower and US index futures higher but being ignored by rates market.

Today we get ADP at 8:15 AM ET, followed by Markit PMI at 9:45, along with construction spending and ISM at 10 AM. Of course we also get the FOMC at 1 PM ET.

So finally, we are going to get the 3% in cash 10s, and maybe a little extra given the help we are seeing from the rest of the world in rates space. For choice today in TYU, let’s call the range 119-16 to 118-29. ADP in a couple minutes. Definitely add some more gamma when things slow down. If we take out 118-29, watch 118-27, but below there look for a quick 4 bps to 118-18+.

Good luck today,