markets nervously choppy, concession build ahead of record 20y supply(Wednesday)

USD markets trading little changed this morning on at best average interest and volumes: small better to risk, dollar small lower, Treasury yields mixed. As of 8:40 AM ET, Treasuries are either side of unchanged after some portfolio buying in belly and RV covering in 20y sector that had richened all night; meanwhile, USD equity index futures trade mixed to flat ahead of the cash open.

Treasuries opened firm in Asia, with better Aramco post-deal pricing flow seeing receiving in USD 30y and 10y swaps shortly after the open, along with Japanese real money buying in US 10s and WN contracts (something they had stayed away from lately). When Japan reported record high number of hospitalizations from COVID, NIKKEI turned lower as fixed income rallied. Flows in Treasuries were actually quite light on this as we drifted up to the highs of the Asian session and then traded sideways into the European open after Tokyo lunch, despite Asian bank paying in USD 5y and 7y swaps.

The usual central bank buying of WN ultras, 10s and mortgages took us to the highs of the day into the London open, before drifting all the way back to unchanged over the course of the London morning. There was deal-related paying mid-morning in USD 30y swaps, but then more paying just before NY arrived in USD 10y and 30y by macro account. General theme since early morning in London has been RV selling of calls and then later buying of puts in TYF (January) and US classic, especially after the call skews have gone ballistic the last few sessions. Heard some interest to sell 10s against bunds by European hedge fund, while US bank paid in USD 7y and 10y swaps just as NY arrived. RV sold 20s early in London but was seen covering some in the last 45 minutes, with 20y set up seemingly the driver since mid-morning in London as market quieted appreciably.

Asian session saw small effort to build concession for JGB 20y issuance, but that quickly disappeared with announcement of record number of cases in Tokyo. JGB auction was mediocre at best, but some risk off kept JGBs bid, helping them to end .5 bps lower in 10y yields, with curve bull flattening. Aussie 10s were bid early after yesterday’s supply, and then further bid on domestic bank buying of intermediates, with Aussie 10s closing down 7 bps in yield while Kiwi yields were 5.5 bps lower in yield. NIKKEI gave up early gains to close down 1.1%, rest of Asia was mixed to slightly firmer but with NIKKEI weighing.

Europe saw fixed income open firmer, only to see better concession building for bund, 15y gilt auction and the US 20y bond auction. There was a seller of OAT futures and SPGB 10y cash, followed of course by selling in PGBs from 4y to 7y. Volume wasn’t huge but it was pretty consistent to selling, with small risk on sentiment given some progress in Brexit negotiations, with update due from ambassadors on Friday. UK CPI was largely a nonevent, while 15y gilt auction was the best supply of the night, generating a smaller-than-normal tail amid small overbidding. German 10y bund supply was average at best, with a larger-than-normal 1 bps tail but better bidding. European equities are small to better across the board, peripherals in line to slight tighter to core, European major currencies slightly better against the greenback.

Today in the US, we already got housing starts and building permits at 8:30 AM ET, as market barely reacted. Now it’s wait on Treasury’s issuance of (another) record size supply, this time $27BN new 20y at 1 PM ET. Fed speakers today include Williams (12:15 PM ET), Bullard (1:20 PM), Kaplan (6 PM), and Bostic (7 PM ET). Fed will buy $1.225BN of 7.5 to 30y tips at 11:10AM ET before Treasury auctions 10y TIPs tomorrow.

The fairly tame night has allowed for a better set up for today’s 20y supply, that probably needs a little help given its richening both outright and on the curve over the last few sessions. There remains little doubt about the structural short in duration land, and the sense here is that will continue until the FOMC meeting. Market lines up perfectly to mess with ECB after Lagarde’s comments post the last meeting and the Fed given recent FOMC member comments on extending duration. Clearly both boards are telegraphing need to add further monetary stimulus in lieu of deficient (their view) fiscal stimulus, without cutting base rates further.

Have messed with this 1.57% 30y level we highlighted yesterday but failed to cleanly take it out yet, trading 1.59% right now. Get through there and it’s gapping time. So for choice today, let’s call the range in TYZ at 138-21 to 138-09, after a range thus far of 138-16+ to 138-08. Think risk is trade higher early today but will need some help to get this 20 year issuance which should weigh on prices later in the morning. You should not break below 138-09 or you will have to add distribution down to 138-05 if not all the way to 138-01+. Below there, support comes in at 137-26, 137-23, 137-19. Resistance meanwhile comes in at 138-14, the 138-21 objective, 138-25, 139-02. Option expiration for December options this Friday, deal with that later today.

Have a great hump day….