Risk is casting a cautious eye on the world this morning, on the heels of Trump accusing China of “(breaking) the deal” at his pep rally in Florida, even though he followed that up with telling his audience not to worry that “it will work out.” Not to be outdone, North Korea launched some type of “projectile” (not making that official South Korean description up) that set the tone for this day. There is not a sense of panic in the market, but risk sentiment remains defensive. As of 8 AM ET, Treasuries were 2.75 to 3.25 bps lower in yield, with 5s and 7s leading the way, while US equity futures were down .75% to 1% ahead of the cash open.
Treasuries opened in Japan to slightly better deal-related receiving in 10y sector on deals that priced late yesterday, but were then supported by Trump comments on Chinese trade dispute and eventually received further support when the story of North Korea firing a “projectile” (okay, thought to be a small, short-range missile). Chinese April CPI came in line at +2.5% y/y, but a small uptick in PPI (+.9% y/y vs +.6% expected) seemed to steady risk sentiment slightly for the second half of the Asian session. Interestingly, flows were actually better to hit bids in Treasuries on uptick by Japanese accounts throughout the Asian session. Leverage money was best buyer on both news events, mainly in FV, TY, cash 2s and a smaller bent in cash 10s. Asian real money was a better seller of 5s throughout the session, with central banks again selling 5s and 7s throughout the night, albeit not in the sizes seen yesterday. Japanese real money traded both sides of 10y but was a better seller of 30s ahead of today’s 30y supply. RV took advantage of the higher prices to sell 30s shortly after Tokyo lunch. Japanese asset manager added USD 7s10s steepeners in swaps, with Japanese insurer receiving in USD 30y swaps outright and in small size on the curve against 50y. JGBs were fairly quiet, trading sideways but better bid in the belly ahead of the BoJ’s purchase of JGB 5s and 10s. Aussie fixed income rallied slightly in a flattener. Meanwhile, Asian bourses saw losses between 1 and 2.5%, although the Kospi and Kosdaq were down 3%.
Europe saw Treasuries trade sideways through the open, with bunds under early pressure ahead of supply out of Spain and Ireland. Bunds caught a bid shortly after the open that helped underpin Treasuries on peripheral widening, that being driven by 5-Star demands that the ECB help rescue Banca Carige after BlackRock pulled out of financing deal for the lender. Block seller of BTPs along with real money selling in BTP 5s and 10s forced Italy 7 bps wider to core and took rest of peripherals along. Spain issued to decent demand in 5y, mixed reception in 10y, and very tepid interest in 30y after being dragged wider by Italy. Irish 30y is suffering a similar fate as demand for non-core paper on the continent wanes today. When the North Korea story broke shortly after 3 AM ET, Treasury futures traded to their highs of the session and have largely traded sideways since; the opposite is true in US equity indices. Flow-wise, real money continues to sell bund calls on upticks, today selling RXN 170.5 calls after firing on 170 calls yesterday, and continues to add steepeners on the bund curve, selling bunds against bobls. Macro account bought RX to sell TY after the latter outperformed on the North Korea story. Hedge fund sold US 10s, while RV sold 30s outright and on the curve against 5s ahead of today’s auction. Gilts saw a large tail and soft bidding for the 5y gilt issuance today, as gilts have underperformed Treasuries and bunds, with chatter of Tory and Labour negotiators “exchanging documents” in an effort to solve the Brexit dilemma. Flows since NY arrived have been rather tame ahead of a busy event/data day in the US. Equities in Europe are down between .75% and 1.2%, with peripherals off slightly more than core bourses.
Today in the US, we get PPI, Trade Balance, and weekly claims data all at 8:30 AM ET, while wholesale inventories will be released at 10 AM. At the same time as the data dump (8:30 AM), Fed Chair Powell will deliver opening remarks at the Fed’s Community Development Conference, while Evans will follow Powell, speaking at the 1:15 PM ET to the same group. In between, Bostic will speak on the economic outlook at 9:45 AM ET in Louisiana. The final highlight of the day will be Treasury’s issuance of $19BN in new 30s to wrap up this quarter’s refunding cycle in the long end. Given how poorly the first two auctions have gone this week, today’s 30y will be closely watched.
Can’t lie here, US fixed income market trades tired the first three days of this week, rallying but unable to find another buyer before giving back gains each day. Granted, the internals still look pretty solid (volume, increasing open interest on the rallies, etc), but the shorts are managing to get out somehow it would seem. Should not go without notice that Stone McCarthy asset weighted duration number jumped in yesterday’s report to 100.1% from 99.9%, after having been as low as 99.1% three weeks ago. It’s not a flashing danger sign (that comes much closer to 103.5%), but it is warning. It seems that the bull steepener is the more painful trade, and the Fed seemingly shut that idea down last Wednesday. Can’t see trend change, but after one more thrust higher, might be willing to entertain a retracement. That actually makes the idea of being long a synthetic call structure here even more appealing. Our idea yesterday was to get long FVM 115.25 put (expires 5/24, 15 days) for 4/64 against 115-24, buying 20% delta in FVM. Today, against 115-24.25, that same structure is quoted 4/5, so that opportunity is not as appealing, but if vol softens this morning and one gets a chance to buy that synthetic call for 4.5/64 or less with delta, it’s a good idea. Okay, time to get to work. For choice today, let’s call the range in TYM at 124-10 to 123-25+; that is with little confidence though as feels that we are going to make a better run. We are going to try the upside early, and if 124-10 gives way, we will be trading 124-15 in short order; above there, resistance comes in at at 124-25, 124-29+, 125-04. If we don’t take out 124-10, and can get through 123-31 early on the downside, then we should breach 123-25+ for a run to 123-19 to see if we can fill the trade gap from Sunday night down to 123-15. As for this 30y supply today, this will be one of those perverse “go with it” affairs: if we are rallying, buyers will show up, but if we back up yields greed will keep buyers at bay.
All right, good luck out there today….
mjc