Two weeks ago, would have told you this number doesn’t matter. Reality is that it still doesn’t matter in the big picture of economics and Fed policy, but in the far more important picture of Pnl, it is a powder keg. As we speculated yesterday morning, you are most certainly going to take this number on an extreme in virtually every major US market sector: yields, equities, and FX.

Here are a few bullet points to consider before the number:

*From last night, a night of another 7 bps selloff in US 30s as yield curve further bear steepens, you would think it was all selling. Wrong again. There was very very good buying during the Asian session. Japanese real money lifted 10s and mortgages; of course, central banks did the same, but today they skipped buying Ultras. Instead, Japanese lifers bought the long end in cash 30s. Asian real money bought 5s and 30s, as Treasuries saw yields drop 3.5 bps in the long end.

*But when the selling stopped just before midnight ET, the sellers came out in force. Asian real money account sold 10s and 30s and paid in USD 30y swaps. Can’t be clearer: it’s the same seller who has peppered the market all this week after the buying stopped before the European open. Take a look at Chinese currency and see if you can figure out who is selling USTs. There was also CTA selling through yesterday’s lows before the European open. US fixed income bounced on the very soft German factory orders (-28.5% m/m for April), but that just gave macro and fast money accounts slightly better levels to sell. The best volume has been in Treasury futures, notably selling in TY and US classic contracts. There has also been paying in USD 5y and 7y swaps by REITs, commonly referred to by many as “convexity hedgers” these days.

*Yesterday afternoon saw a steady offer in Treasuries but much better actual trading, aka selling, in swaps. There was paying in USD 5y and 7y swaps from the same REIT community, while RV used the pressure to add steepeners in FV/US and in USD 5s30s on the swap curve. You busted most of the CTA longs already but you still are putting pressure on the bad longs and the servicing community. Open interest dropped in FV, TY, and US again yesterday, some confirmation that this large move is about getting bad positions out of the market as well. But it doesn’t feel like the last person has cried “uncle” yet.

*Okay, what about this fine day? Well, there was a full moon last night for you lunar cycle guys, so maybe we are supposed to have a turn. Question is, was the turn this week (i.e., breaking the bull trend for Ts) or is it the turn for the pullback? Not so sure. Some levels to watch: .90% in cash 10s should come in at 137-04 in TYU, while 1% will come in at 136-05 in TYU. Meanwhile 1.75% in cash 30s comes in at 171-10ish in USU contracts. Other key levels come in at 137-11 in TYU (you will likely be standing on this number in 15 minutes!), 137-09 is .236 back on the year, 137-01, 135-14 is .382 back on the year. Really really want to be long a call here for the trade, but best bet tells me to be as flat as possible. Here’s best read from the tea leaves: buy a test of 137-04, but be ready to get short below 137-01, because real money will either be there like they have advertised or it gets uglier. On the upside, you could run all the way to 138-24 in a heartbeat, but there will be better sellers on the way up. Sell a test of 138-04+ and add against 138-10. But would have to flip if we took out 138-24. There you go, got myself perfectly hedged for anything because while I want to be bullish, the smell of burning Pnl makes me think they haven’t all capitulated yet.

We can discuss equities Monday, but it’s the inverse of what we have written above. Cash on the sidelines hurts a manager almost worse than being short, and the equity complex is burning just as many bodies as fixed income.

Good luck out there, be safe, stay dry but avoid being burned, and try to have a good weekend when this is done,
mjc