market turned risk off in Europe with pain for long end shorts again (Tuesday)

We kick off this Tuesday small to global risk off since Europe arrived ahead of slew of US data and speakers today after a night of chopping around without great conviction. As of 8:35 AM, after retail sales, Treasuries are 1-4.5 bps lower in yield amidst a bull flattener, while US equity index futures trade flat in NASDAQ to 1% lower in DOW ahead of the cash open.

Treasuries opened firmer in Asia, anticipating another round of buying seen over the last three sessions during the early evening session. Today that failed to materialize, as Treasuries then backed up on the combination of Saudi Aramco opening books on it’s 5-part jumbo USD issuance and on concession pressure for AOFM 2041 Tap. There was decent paying in USD 5y and 30y swaps mid-session in Asia on the Aramco deal, along with selling of US 20s on pressure for that sector from the Aussie syndication. Treasuries then tracked at their lows of the night until just before the European open.

As usual, central bank buying materialized on the handover to London, buying ultras, US 30s, and of course mortgages. There was some hedge fund buying in US 30s outright and some some 3s30s flatteners that went through before better deal-related paying in USD 30y swaps but then real money receiving in USD 10y and 30y swaps. Once again, volume in European session was better in swaps than in Treasuries/futures. Another 20K TYF 135.5/136.5 put spreads were bought against TYF 139 call, paying 1/64 while exchanging 28% delta at 138-02 in TYZ futures, along with some thematic buying of US bond calls again. As NY arrived, there was paying in the front end of USD swap curve along with buying of US 10s by portfolio account.

Asian session was a tough slog locally. The unmet expectation of buying in Treasuries left its mark on both Treasuries and Asian rates markets. JGBs ended the session flat but steepened ahead of supply next week. Aussie CB minutes were of little support and the AOFM 2041 Tap caused some serious indigestion in an already overcrowded long that was felt as far away as UST market. Aussie 10s ended the session 6.5 bps higher in yield, while Kiwi rates were 7.25 bps higher. It was not a great day for debt markets in Asia. Asian equities traded mixed in a quiet session, NIKKEI higher (+.42%), China slightly lower, everything else mixed.

European session saw better bid on talk of further lock downs across Europe, garnering further support from talk Italy is looking for ECB to forgive ALL Covid related debt (trying not to laugh). Good buyers of Spain outright by real money, but also heard RV buying against BTPs and bunds. German schatz auction was mixed affair, but barely was covered. Average 3y but good 30y gilt supply was net/net supportive for gilts, better hedge fund buying of 30s after the auction, both outright and on curve against 10y gilts. Good interest in adding front end steepeners in short sterling (L H1/M1 and H1/Z1) space as well on further Covid concern. European equities are small lower thus far today.

Today in the US, we get retail sales and import prices at 8:30 AM ET, IP/CU at 9:15 AM, business inventories and NAHB index at 10 AM, while wrapping up with TIC data at 4 PM ET. Powell speaks again today, this time on a virtual panel at 1 PM ET, followed by Bostic, Daly, Kashkari, and Rosengren speaking on racism and the economy at 3 PM ET, while Barkin discusses the economy in a webinar at 3 PM as well.

Long end vols are bid today as market trades very nervously. After weeks of arguing there is a structural short in the long end that is set to feel some pain, today seems to finally give off a sense that the market is cognizant. Let’s see what happens. Watch 1.68% in cash 30s here. You take that out and you could really feel the squeeze outright and on the curve. For choice today in TYZ, let’s call the range at 138-14 to 138-03, after an overnight range of 138-07+ to 137-30+. Support comes in 138-03 level, 137-31, 137-26, 137-23, 137-19, 137-10; resistance comes in at 138-07+, the 138-14 objective, 138-25, 139-02.

Have a good Tuesday,