Market traded small risk on overnight, after an impressive late move by US equities on Monday seems to have brightened everyone’s spirits. Volume and activity have been light in general, owing to today’s calendar (Powell and supply) and a holiday in Japan (Foundation Day). As of 8:40 AM ET (after Powell transcript released), Treasuries are 2.5 to 3 bps higher in yield than yesterday’s 3 PM ET marks, while US equity index futures are trading very small positive ahead of the cash open.

With Japan closed for Foundation Holiday and rest of Asia focused on CoronaVirus, the Asian session was very quiet indeed. Treasuries reopened on their 5 PM ET marks, higher in yield by roughly 2 bps after the late-day rally in equities, then took one more leg lower before flat-lining into the European open. There was some RV selling of 10s ahead of supply there tomorrow, both outright and against 7s on the curve, just normal auction set up; there was also central bank selling in smaller size in 2s and 3s, the latter set for new issue auction later today. Locally, Australia issued AUD 100MM of 2030 linkers that met with strong demand (bid to cover of 8.4:1, last was 3.2 times), while increasing foreign issuance in AUD did little to dent an underlying bid to Aussie rates that allowed Aussie fixed income to close flat on the day. Kiwi rates were slightly better bid throughout the night, even easily digesting an IBRD 5y Kauri deal. Lot of talk about Formosa issuance into the London open (more on that in a second). Asian equities that were open rallied small after the performance of US product, with Hang Seng (+1.25%) posting the best gains of the majors.

The European session has been about waiting and making room for supply while we wait: Italian 15y, UK 50Y, along with several corporate/agencies, from the likes of Siemens and 50y issue for Societe du Grand Paris. There was hedging early with a large OAT block sold against buying bunds, but later a bund/BTP spread that saw RV account buy BTPs to sell bunds (they just love this BTP no matter who gets a no confidence vote). Increased concern over infrastructure and funding (Johnson announcing pieces to major infrastructure program) have weighed on gilts throughout their session, with hedging of 50y gilt supply helping to steepen the curve. Treasuries saw hedge fund selling of 10s outright, some deal-related paying in USD 10y and 5y swaps, and fast money selling 10s on the stronger-than-expected UK GDP report. Once Europe was opened and the day’s first levels were established, fixed income has basically traded sideways throughout the European morning.

The focus in the market early today is in vol and issuance. Late yesterday, Citi issued $350MM in 40y Formosa, and since then several other issuers are lining up to do the same. All you need to know is Bloomberg headline at 1 AM ET: “….Formosa Deals Gain Focus”. If it’s printed, everyone knows it. Vega took a beat down late yesterday on the Citi supply and trades heavy this morning as some of these smaller deals come to market while others kick the tires. Remember last week when you couldn’t buy vol, and when you did you didn’t want it? And then it went bid again??? Well clearly a number of yield enhancement accounts noticed too and they ALL want issue in Formosa this week. Let’s see this play out and go from there.

Today’s calendar for data is just the JOLTS survey at 10 AM ET, but Powell’s Q&A will be the market’s focus today, with his speech released just now at 8:30 ET, largely echoing the Fed’s semiannual report that was released Friday. Let’s see what his non-scripted thoughts are around 10:30. Lastly, Treasury will auction $38BN in new 3y notes at 1 PM ET to kick off this week’s quarterly refunding.

This market is painfully trapped in a larger range. The fake break to the upside yesterday is but a memory for now. The lack of volume, global holidays, and geopolitical concern over this virus only make it harder to trade. For now, fade the market in TYH space on trades to 131-09 or 130-21. When things change, go with a trade through 131-12 or 130-17. Use “through” 131-12 as a buy signal to stop in long for 5y cash, and use 130-17 as a sell signal to stop in for a short in USH. So against that backdrop, for choice let’s call the range in TYH today at 131-07 to 130-23 (range thus far is 131-06 to 130-28+). Wouldn’t be long vol here given the appetite to issue Formosa but would be more than happy to buy some gamma as it tries to keep pace with cheapening vega. At least there’s something interesting for us to keep an eye on.

Have a good Tuesday,
mjc