Markets are putting in a choppy session, light volume being pushed around by news stories pretty easily and lacking any type of real conviction at the moment. Chinese reverse repo operation added to early risk on sentiment, but story that China had contained the virus (seriously, no comment!) pared the negative sentiment mid-morning in Europe. At least we already have a bigger range in Treasuries than we traded all of yesterday, but that isn’t saying much. As of 8:20 AM ET, Treasuries bull flattening .5 bps (2y) to 4 bps (30y) lower in yield, while US equity index futures are roughly 1% lower ahead of the cash open.
Treasuries opened in Asia slightly softer on some US deal-related selling in 10s and 5s, after another bang up day of HG issuance on Wednesday (23 deals for approximately $28BN in new paper). There was early risk off move ascribed to US COVID stories, but it seemed the bigger bid to Treasuries was when PBoC injected $70BN yuan via a 14-day reverse repo operation, cutting the rate to 2.35% from 2.55%. At roughly the same time, there was a buyer of US 30s, with Asian real money receiving in USD 30y swaps. There was buying of ultras by Japanese lifer again (finally got the story on their motivation: WNU contract is very cheap on a pure duration basis, for you TRS folks). As usual, Asian central banks bought 10s and 30s, along with their normal mortgages. Japanese real money and macro accounts were buyers of 20s, the latter selling some 5s against it. Asian bank paid in USD 5y swaps after Tokyo lunch as Treasuries drifted off their overnight highs into the European open.
What little volume there was in Asia for Treasuries quickly dissipated during the European session. Other than one flourish at 4:30 AM ET on the headline “BEIJING’S OUTBREAK HAS BEEN CONTAINED: CHINA CDC VIRUS EXPERT” that saw risk pop at the expense of Treasuries, US rates have simply meandered in a 2 bps range for the last seven hours. There was levered selling of TY and US contracts on the headline, after there was slightly better European real money buying of US classic contracts and new cash 20s, some deal-related paying in USD 30y swaps. BoE was not as dovish as some had expected (increased QE, but left door open to slowing pace), resulting in one last effort to pull back to unchanged as US arrived and levered money lifted FV and TY contracts.
The Asian session was quite simply a risk off affair. Weaker than expected Aussie employment report set the tone, with fixed income better bid. The PBoC reverse repo 20 bps lower added to the sentiment as well. Interesting, JGB 5y auction found only soft bidding although at decent levels, a bit of a change from recently. Flattening was the theme in Asia, with all rates markets retracing some of the recent steepening. JGB 10s closed down .5 bps in yield, Aussie 10s were 4 bps lower in yield, and Kiwi yields were down 2 bps. Asian equities were mixed, Japan down .5%, Hang Seng basically flat, while China was better on the back of the Beijing story.
The European session strangely saw bunds open better despite a slew of sovereign issuance on the docket today. That didn’t take long to correct though, as bunds quickly caught up to the US rate pullback, with dealer selling of bobls and a few bunds (most issuance in 3-7y sector), RV selling of OATs and bobls, along with macro adding OEU/UBU (5s30s, bobl/buxl) flatteners. The Spanish 3y auction was a touch soft, with better results for the 5y and 6y, and actually solid interest in the 10y supply. Meanwhile, French issuance in 3y, 5y, 6y, and 8y all met with smaller tails but slightly lighter bidding; the French 6y linker also sported a smaller tail, but to slightly better bidding. Post-supply, the flattening trend continued in Europe and is trying to keep up with bid in last hour for USD rates.
UK was all about the BoE, which largely was in line with expectations, but disappointed when it indicated that even though it was increasing size of QE, it intended to stretch out purchases over a longer horizon. The 20y sector of the gilt curve got hit hard, taking US 20/30y sector off it’s flattest levels as well. There was aggressive macro and RV selling of UK 20s and Gilt futures. They have bounced a bit in the last 20 minutes as risk turns further sour. Equities in Europe are down between 1% and 2% into the US open, doubling their losses in the last 45 minutes, as Europe and the UK are nonplussed with the BoE’s machinations here.
Today’s calendar in the US includes claims and Philly Fed at 8:30 AM ET, followed by LEI at 10 AM. Mester (12:15 PM ET), Bullard (2 PM), and Daly (7 PM ET) all speak today, although Daly’s is at a commencement. Lastly, Treasury will wrap up this week’s issuance on the curve with $15BN in reopened 5y TIPS at 1 PM ET.
Alluded to the Mercury going into retrograde in the title today, and before you rip on me too much, I agree it’s goofy, but there is some actual correlation to magnitude of moves during these periods. Never one to embrace any of these shenanigans but never one to ignore if we threaten a break out in any market. Fair warned is fair armed. So back to reality here Mr. Jetson, and we remember that all we could eek out yesterday was a 3-4 bps range everywhere except in 30s where we got (almost) got a 6 bps range. Please shoot me now. The volume overnight was worse than yesterday as well. BUT, the range is already equal to or larger than yesterday’s ranges across the curve. So, you’re saying there’s a chance…and the Mercury retrograde, never mind.
Against that backdrop, let’s call the range in TYU at 139-00 to 138-21, after an overnight range of 138-27 to 138-16. Risk early is strong Philly Fed (noise) that takes us back into yesterday’s range and we trade down to 138-14+, risk after stocks open is to take out 139-00 and it could get ugly. Support in TYU comes in at 138-21 level, 138-14+, 138-10, 138-07, 138-01+, 137-30+, 137-21, 137-15; resistance comes in at 138-27, the 139-00 objective, 139-06+, 139-09, 139-13+.
Have a great and safe Thursday,
mjc