late update but useful after last week and ahead of this week… (Monday)

It was the quietest evening in almost two weeks today, with better sentiment to covering shorts and adding a small amount of risk overnight, all within the framework of a very quiet session thus far. On the cash equity open, stocks were up less than 1/4% across indices, while Treasuries had clawed their way back to almost unchanged in a small steepener.

Asian central banks were LARGE sellers in the first three hours of the Asian session, one source claiming they were 1/3 of the (albeit very light) volume during that period. They sold 3s, 5s, and 7s in decent size, very good size against the backdrop of this evening’s paltry participation. Asian banks as usual bought 5s and received in USD 5y swaps outright, happy to be the beneficiary of the central bank pressure on the belly of the curve. One last interesting note is that central bank and Japanese real money were largely absent in spread product, which as you know is quite the departure from recent norm. There was some profit taking in Aussie rates, in great measure fueled by pullback in Ts, as rates there backed up 3.4 bps in 10y space; meanwhile, JGBs came under mild pressure on the back of the move in Treasuries, closing .5 bps higher in an otherwise nondescript session. Volume tapered off greatly ahead of the European open, with Asian equity indices mixed, as NIKKEI and China were barely changed but the rest of the Asian bourses came under mild pressure after having held up better for most of last week.

European session was quiet, with a packed calendar later in week including Sintra Conference (tomorrow and Weds, ECB version of Jackson Hole), FOMC (Weds), BoJ, and BoE. So Europe has been quiet until NY arrived, with early focus on Treasury weakness as well as some concession building for today Belgian supply. Coeure (FT interview) and Nowotny comments over the weekend (largely dovish) were ignored ahead Sintra. There was better early bund selling for the Belgian supply as well as some selling of bunds against BTPs by dealers as money managers bought BTPs shortly after the European open, some citing Nowotny comments about the peripheral economy in particular and the EU economy in general not doing as bad as some analysts claim. The Belgian supply was a mixed affair, with decent results for 5s and 20s, but disappointing bidding in the 10y supply. Mid-morning, there was buying of schatz (German 2y) against bunds and in EUR swaps against paying in EUR 10y and 20y, both of which helped to steepen the curve; after NY walked in, the selling of bunds picked up outright (2 separate blocks), weighing on Treasuries until soft US data undid all the damage to US rates. Gilts came under pressure from RV selling given the 1/4 point drop in bunds as well. Meanwhile risk moved more to neutral from positive in European markets as NY trading picked up.

Data for the day is done, but really all that matters this week is ahead of us anyway: FOMC is the big boy, but don’t fall asleep before or after the press conference, thinking that is all that matters. BoJ and ECB will be important, as will what comes out of Sintra Conference. But as we wrap up all those fun things, we also can wind up into quarter end, previewed last week by the way vol markets locked up when it got dicey from Tuesday through Thursday.

Okay, so very light volume today but, after a couple hours of the new US week, can tell you definitely that no one is resting comfortably here. Markets remain illiquid in anything but vanilla term structures, with positioning for Wednesday being the driver, and everyone getting trades done is wondering if they just picked up a whole nickel in front of that rolling steel drum down the dead end street. The only certain thought I have remains the same: the market is not done pressing the structural short in front end nor the structural short in vol…..and think about that in tandem but not as proxies. Most folks are thinking they are the same trade expressed two different ways, but they are actually two separate bases that then ramp up the pressure each time one of them gets pressed. It’s ugly and it will get uglier until such time as the Fed cries “uncle” and starts cutting, deservedly so or not. To wit, saw someone write today, “as regional Fed surveys on inflation track lower, the curve gets forced steeper.” When in normal times and normal economic theory has one learned that deflation is a steepener? Enough. The pain is where it is, and the roots stem from the Fed, so now the Fed will have to clean it up, hopefully without many more body bags.

For choice today in TYU, let’s call the range at 127-12 to 127-01 for the rest of today (range overnight has been 127-12+ to 127-03). Think we settle in, risk continues to get covered, and we see rates back up. Support on the downside comes in at 127-05, 127-01 level, 126-24+. Get through there and you might be able to run 126-09 tomorrow. That would be great; it won’t happen. On the flipside, get through 127-12 and it gets dicey quickly: 127-17/18+, 127-21, 127-28, and 127-31. That would be roughly 2% in cash 10s and is THE line in the sand, and should not be tagged under any circumstances before the FOMC. The thought here is mitigate risk to front end (if one can do that), look to add conditional bull steepeners after FOMC (when many will be looking for flatteners ahead of month/quarter end), and come out of Wednesday long the upper left.

Enough for one day, I am exhausted already….