Markets are trading better to risk off since late yesterday. A good rally in equities, $41BN in new issuance (to get us a nice round $105BN in high-grade issuance as a weekly record was set), and some easing of dollar-funding issues in Japan all helped bid risk appetite late yesterday. Alas, the resumption of trading in Asia stymied the glee, as market has traded risk off since then. Volume remains light, liquidity remains absent from the market. As of 8:15 AM ET, Treasuries are trading flat to 4 bps better in another bull flattener, while US equity index futures are trading off just over 2% ahead of the cash open. There are a couple things to think about/watch for today and over the weekend.
*First off, April options on June Treasury futures expire today. Here is breakdown of OI that requires some attention:
US TY FV
CALLS STRIKE PUTS CALLS STRIKE PUTS CALLS STRIKE PUTS
1400 177-16 900 20,000 137-16 14,000 10,000 124-16 9000
3800 178-00 2400 4000 137-24 5000 29,000 124-24 24,000
900 178-16 500 40,000 138-00 6000*** 11,000 125-00 1000***
1500 179-00 1900*** 12,000 138-08 2000 24,000 125-08 2000
1000 179-16 500 14,000 138-16 1400 21,000 125-16 3000
4000 180-00 4000 8000 138-24 5000 4000 125-24 300
600 180-16 50 65,000 139-00 5000 20,000 126-00 100
4000 139-25 300
***denotes ATM as of 8 AM ET on Friday
So we have made a nice move to effectively pin strikes into the US open at 179-00 in USM, 138-00 in TYM and 125-00 in FVM. However, if one stays objective and doesn’t try to read anything into the data, you have to watch the open interest at 139-00 in TY and 125-08/125-16 strikes in FVM. Get above 125-04 in FVM and it could get ugly, helping to pull the TY up to levels that may put the 139-00 strike in play. There is no reason to prepare for that here, but there are a LOT of reasons not to be net short given this information and the general tone of the market, as laid out below. If we break 138-16 in TYM, we will trade 139-00, likely 139-08 to get all the 139 call shorts to cover– in futures of course, so they can feel double the pain as opposed to paying 1/64 to cover the call right now; some things never change!
*Month end extensions look to be about .04 years in Treasuries, .06 years in EGBs and .02 years in gilts. Fiscal year end in Japan will be next Tuesday, and it looks like the booking of gains on Treasuries has largely passed, so market will expect buying after April 1 out of Japan, not to mention the new buying program by uber-large postal pension GPIF. We saw some month end buying two days ago, some small Asian real money buying Wednesday night and last night in 10s and 30s, but there is more to go and it often happens late on Friday before the weekend when month end falls early the following week. We saw a rebalancing trade yesterday afternoon (at least, that is what I am told was the reason for the equity/FI move), but it’s always hard to really quantify how much will be done.
*Funding continues to be an issue, remaining supportive out the Treasury curve. Last night’s latest ICI data release again saw massive inflows for MM funds this past week, an additional $345BN, taking the amount in MM funds through $3.094TRN, a colossal number and a continued source of angst for the Fed. Prime funds saw an additional $54BN in outflows, and now you know why there continues to be such issues in the CP/CD markets. Further, 3ml set another 7.55 bps higher today, as the Fed looks for more Tylenol; there are a number of issues such as the end of the quarter and end of Japanese fiscal year end that are being labeled as the culprit, but if this continues in April it will be a problem. This all remains a long end support function for Treasuries.
*On the flipside, dollar funding issues eased slightly overnight in Japan after BoJ has been simply frustrated in their efforts to calm the dollar hoarding there. We’ll see if this was a one-off or maybe BoJ has finally unclogged the pipes. Don’t bet on it though.
*Anecdotal evidence shows how fragile the “recovery” remains in Italy. When the Dutch PM came out against Coronabonds or Eurobonds overnight without conditions on the other peripherals, BTPs got taken to the woodshed, widening 20 bps to Bunds in a matter of minutes. All it takes is one to upset the apple cart. Likewise in the US, we will all be watching our news feeds this weekend, just to make sure the US House passes the stimulus bill; nothing is ever a given in that body these days. Obviously if we have a stumble, we will all get to work on Sunday night again!
*Today we will get the usual POMO kicking off at 9:50 AM ET. I guess we’ll watch Michigan at 10 AM ET because it is theoretically topical, but we won’t really trade off of it. For choice today, but with some really mixed signals and absolutely ZERO conviction, call the range in TYM at 138-14+ to 137-24+. Obviously, the upside is the risk today; take out 138-14+ this morning and you are likely to make a bee-line through resistance at 138-16, 138-18+ and straight up the strike at 139-00. Above there resistance comes in at 139-03+, 139-07/08, 139-16. On the downside, support comes in at 137-29+, 137-24+/24, 137-21 (pivot!), 137-09+, 137-06+, 137-00 strike, 136-27+ and the key 136-20+ level. Enjoy, don’t be short gamma here and if you are short the TYJ 139-00 calls or the FVJ 125-16 calls, just pay 1/32 and don’t risk getting stabbed in the gut!
Have a restful, healthy and safe weekend,
mjc