Choppy overnight session but on lighter volumes as markets trade both risk on and risk off ahead of the US open. Hangover from the corporate-supply and buyer-strike bond rout of this week and China tweets/announcements have driven what light flow there has been overnight, but markets trade relatively unchanged ahead of the US open. As of 8 AM ET, Treasuries are flat to 1.2 bps higher in yield from 3 PM, but lower from their 5 PM levels, in a flattener, while US equity futures are marginally higher ahead of the US cash open.

The early trade in Asia saw follow-through pressure for Treasuries after they got spanked again post 3 PM in the US (deal-related selling again). Flows saw CTA selling of TY contracts, with some US real money selling of 5s just after the Tokyo open. Some concession building ahead of Aussie 2030 supply and JGB 5y auction kept a lid on Treasuries and Asian fixed income; both supply events were sloppy and relatively poorly bid affairs. However, coming out of the supply, Asian real money took the opportunity to finally step in and buy Treasuries, lifting intermediates by purchasing 7s and 10s, while Japanese real money then received in USD 30y swaps, while other Japanese real money accounts were seen lifting spread product, although heard light in the favored MBS sector. Locally, the concessions and sloppy issuance combined with the performance of Treasuries on Tuesday to leave JGBs 3.5-4 bps higher, led by the belly, while Aussie 10s backed up 4.75 bps and New Zealand 10s softened 6.5 bps. As for equities in Asian, most indices posted gains between .75% and 1.5%, with the NIKKEI up 1%; Chinese shares were better early before stumbling into the close (see below).

Around the London handover, there was tweet from the editor of the Global Times indicating that he had discussions with senior Chinese officials that indicated China would ease its tariffs in hopes of easing the impact of the trade war. Markets turned to clear risk on, with 10y Treasuries breaking 2.5 bps while eminis went from down 8 to up 9. There was levered selling of 10s on the headlines, some European real money selling of 10s outright and against bunds and some London macro paying in USD 5y swaps. Shortly after the European open, there was deal-related paying in USD 30y swaps and and outright selling of US 10s, with similar flow seen in bunds and schatz ahead of the Italian supply tomorrow. When China did eventually announce some “exemptions” to the tariffs, the event became more of a “buy the rumor, sell the fact” for risk after a knee-jerk addition for risk, as market seemed mildly disappointed by the actions. Since then, risk has move back toward flattish while global fixed income has crawled back toward flat, with bunds actually up on the session. There has been some macro and fund selling of gilts on Merkel comments embracing an “orderly” Brexit and Johnson efforts to solve the Irish backstop hurdle; RV has been a better seller for UK 10s to buy German 10s on these developments as well. Since NY has arrived, there has again been better deal-related selling of intermediates by dealer desks, along with RV selling of TY to buy US classic contracts and cash 5s, as RV accounts look to position for today’s supply in the 10y sector. European equities trade marginally better, with crude higher and gold flat.

Today’s calendar is highlighted by PPI at 8:30 AM ET and then Treasury’s issuance of $24BN in 10y reopening at 1 PM ET; we will also get wholesale inventories and trade at 10 AM. Fed in blackout period, so no one will be chatting. However, later today attention will turn to tomorrow’s ECB meeting.

First point to make after being gone for a couple days about this “massive” sell off in Treasuries: we have had over $100BN in corporate issuance in the first 10 days of this month, with a decent calendar still trying to get priced before the FOMC next week. And you are having a meltdown because rates have backed up some 20 bps during the first third of this month? Seriously? If you are bullish, buy something. It will be a winner soon enough. Okay, kicking the soap box to the curb, for choice today in TYZ, let’s call the range at 130-11 to 129-28 for the rest of today (range overnight has been 130-03 to 129-26). Support comes in at the 129-26 level, the overnight low at 129-26, 129-22+, 129-20+, 129-10, 129-08, 128-28; resistance comes in at 130-03 (overnight high), 130-08+, aforementioned 130-11 level, 130-17, 130-23, 130-26, 131-02. Here’s the deal: corporate rate locks will continue to weigh on market until a few more deals get priced and fast money is pushing the market with a current dearth of buyers that will end soon. But, if you get a soft PPI report in a few minutes, it could get ugly on the upside. If we get moving, watch 1.65/1.66% in cash 10s; it will be important.

Good luck today and have a good hump day,
mjc