Any hope we had yesterday morning of these markets finding direction was utterly scoffed at by the trade overnight. Even in the microcosm of last night, we saw risk off during Asia, following the late pullback off the highs for risk in NY, only to see Europe reverse course. Volume is fair at best, optically skewed by massive amounts of calendar rolling in Treasury futures, with activity lagging. As of 8 AM ET, equities are down marginally, having retraced half their overnight losses, while fixed income is mixed to slightly lower in yield.
The Asian session saw risk continue to fade yesterday morning’s early strength, with some hedging of the euphoria over a potential US/China trade deal that had been all the rage just 24 hours earlier. In Treasuries, hedge funds spent the early part of the Asian session covering in shorts set the night before in cash 10s and TY futures, after market failed to gain any traction on the downside yesterday. Asian real money was a small early buyer of cash 10s as well, but bigger flow saw Japanese real money receive in USD 30y swaps to add some duration. RV accounts sold 7s ahead of today’s supply in that sector while also nibbling in 5/30s flatteners via USD swaps. Just before handover to London, Japanese banks were seen lightening up in 10s and selling 7s outright. Asian CB was small early buyer of MBS, but flows in spread product were light at best. Locally, JGB curve steepened on disappointment in the results of BoJ long-end buyback, with curve steepening around 10y that was flat on the session. Rest of Asian fixed income was pretty quiet, some issuance in Australia having marginal impact on prices. Asian stocks turned lower, with China leading major indices slightly lower (-.4 to -1%, although CSI did slump an outsized 1.2%).
From the outset in Europe, focus on imminent announcement by PM May of a delay in BREXIT brought a risk rally, with GBP trucking higher. Gilts led, and continue to lead, bunds and Treasuries on the pullback. Gilt volume spiked just after the open with hedge fund and fast money sales before quieting down mid-morning in the UK. Bunds saw selling on the UK developments, as well as by dealers setting up for today’s schatz auction; some mildly hawkish comments from ECB’s Lane also weighed on bunds (EU employment remains strong, upward pressure on wages building). Treasuries saw RV selling of 7y sector after hedge funds took advantage of the shift in risk sentiment on the open to sell better levels in TY and FV futures. The month end extensions and rebalancing threat (US equities up 3.4% for the month but Treasury benchmarks up only .3% should theoretically mean heavy rotation out of equities into FI) have kept European accounts away from selling the long end. Decent schatz bidding as well as decent demand for UK 10y linker helped fixed income markets bounce off the lows, with some minor US deal-related buying the theme since NY walked in an hour ago.
Today’s calendar includes housing data at 8:30 AM ET, HPI data at 9 AM, and consumer confidence at 10 AM. Most important event of the day will be Powell’s semiannual testimony before the Senate at 10 AM ET, with his prepared remarks scheduled to be released at 9:45. After Powell is done speaking today, Treasury will wrap up this month’s issuance with $32BN in new 7y notes at 1 PM ET today. We will also be watching for announcements on BREXIT delays, comments on the US/North Korea summit, and of course any tape bombs on US/China talks as well. Lastly, the world has done a good job staying calm thus far after the dust up overnight between Pakistan and India, something we really don’t need to see resurface after years of relative peace.
So, who woulda thunk that the range yesterday would have been set before the US arrived, and that we would trade the smack middle of that range all day? Feel kind of stupid after using Sunday night’s trade to trumpet the idea that we might have something seminal this week after the market’s performance yesterday and overnight. But I will stick with owning some gamma here. Gotta, have to, must…and it’s cheap enough not to leave a mark. By tomorrow, Thursday at the latest, we’ll be pitching synthetic payer/put structures so get an extra coffee in the AM. As for today, given the end of this month’s supply, the eventual passing of Powell’s comments (really don’t expect much new, but we will of course interpret them as dovish), and the healthy .12 year extension in Treasuries this month not to mention the rebalancing, have to think the risk is to a rally in Treasuries. So for choice, let’s call the range in TYH at 122-14 to 122-02. Resistance comes in at 122-06+, 122-12, the aforementioned 122-14, 122-19; support comes in at 122-02, 121-29+, 121-24, 121-17+, 121-07.
All right, good luck out there and have a good Tuesday,