On this Saint Joseph’s Day Holiday, markets basked in a small bounce for risk from late US time yesterday through the early Asian session on the combination of a piece that the US Treasury was aggressively lobbying Congress for approval to backstop money markets via the Exchange Stabilization Fund (ESF) and formal announcement from ECB of EUR 750BN for a Pandemic Emergency Purchase Programme (PEPP) at 6:30 PM ET.
Unfortunately, the good news didn’t last forever, with markets retracing a lot of the gains, but these moves are potential game changers and will be seen as helpful down the road. The announcement just before 8:30 AM ET that Treasury is mulling issuing 25- and 30-year debt to fund the $1.1TRN stimulus package is further steepening the curve here. Then the Fed increased the size of today’s buyback from $50BN to $75BN and the markets took back some of the steepening. It may seem a bit silly, but it’s not. It’s what you have to do.
Asian session was an incredibly tame affair. US equity futures traded higher, US curve flattened mildly, and markets took a small pause. Flows were normalized and social in size. There was small Asian bank selling of 5s, along with Japanese bank paying in USD 5y swaps, a Japanese real money account sold US 30s ahead of fiscal year end next week, while macro account received in USD 10y and 30y swaps. Other than some small central bank buying in 3s and lifting a smattering of mortgages, that was it for activity in Asia in USD space.
In Asia, the problem last night was the RBA. They cut rates 25 bps and announced their latest QE program. The QE endeavor will target pegging the 3y sector at 25 bps, which apparently the RBA didn’t realize would cause a massive deleveraging trade. It did, and global risk ran for cover as curve spreads in Australia blew out and, as small as that region may be, it ended all the flattening work. That said, while equities suffered, we didn’t completely fall apart in rates, holding on to some of the flattening. Aussie 3y yields dropped 16 bps, while Aussie 30s gapped 30 higher; the blood was everywhere. JGB yields ended the session 3.5 bps higher in 10y space (JGB buyback in long end held them in), Aussie 10s were 20 bps higher, while Kiwi 10s also jumped 20 bps in yield.
Europe has been devoid of much flow in Treasuries. US rates followed bunds and gilts higher on the formal PEPP announcement, as there was hedge fund doing USD 5s30s flatteners, deal-related receiving in USD 30y swaps, and some European bank selling of US 3s. However, more deleveraging by European RV accounts brought some mid-morning steepening to Treasuries. When it became apparent that all libor settings were going to widen further, there was another bout of deleveraging by RV types, but that was followed by outright safe-haven buying of Treasuries, with European macro account buying US 10s against bunds. Treasuries held a bid early until giving up all their gains in the long end on the Treasury issuance headline.
Meanwhile, peripherals have been en fuego since the PEPP announcement, with Greece tightening over 100 bps and rest of sovereigns somewhere in the 50ish bp tighter range; these things are so illiquid that they gap in 10 bps increments right now. Bunds and gilts opened higher, but both have been under pressure since mid-morning, with the 3m funding wideners adding pressure to rates in both areas. In essence, ECB has thrown a lifeline to peripherals, junk paper, but put high quality paper and sovereigns at risk of being sold to then use the cash in the ECB facility. Again, it’s the right move, but it won’t come without some indigestion. The deleveraging trade in Europe was not really a central theme today, which hopefully is a good sign if we can keep it that way.
The Fed was scheduled to conduct the usual 6 buyback operations for another $50BN in securities beginning at 9:40 AM ET and ending at 2:10 PM ET; now it will be for $75BN. They planned to keep focus on inside of 4.5 years (around $27BN of the total) and TIPs (around $5BN); they are increasing the under 4.5y sector by $15BN as they want that stress bomb defused. The extra $4BN in 7-30y will help as well.
Wow, don’t turn your head today or you will miss a rescue package. By the way, if you got some of that 30y tail gamma on yesterday, that is great, because it richened markedly yesterday against the curve and will be bid again today. It’s not too late; keep with yesterday’s strike at 158 in the USM put and buy with delta exchange; it looks like you could buy a 10.02 BPV vol today mid, 10.25 BPV lifting the offer. It’s good protection and it’s cheap on a relative basis. Heck you moved 10 bps on the Treasury announcement 30 minutes ago. Don’t be greedy right now, pay for protection.
As for choice today in TYM, have to call the range at 136-16+ to 134-16+, after an overnight range of 135-10 to 133-21. Confidence is zero in these “bullish ranges” right now. Yesterday was working perfectly and then market rolled over on a dime and took out the key support at 134-15 and it got totally ugly. Let’s see. That level today is the 134-16+ level, so we’ll see. As for resistance, watch 135-16, 135-25, 136-00+ (if market breaks from any of these, go with the sale), the objective at 136-16+, 136-22+, 136-29; support comes in at 134-29+, 134-22+, the aforementioned key level of 134-16+, 134-03, the uber important 133-27, 133-17, 133-12+/09+, 133-01.
Good luck out there today,
mjc