Minor risk off sentiment in Asia led by a stumble in EM currencies kept fixed income better bid into the early European session. Market has traded mixed since then, although headlines coming out of Italy (5 Star talking about budget being far from done) threaten to re-energize the risk off sentiment in the ninety minutes. As of 8 AM ET, Treasuries are flat in the front end to 1.5 bps better in the long end, with US equity futures mixed.
The early Asian session saw the same flow it has seen since Monday: Asian real money lifting 7s, but this time taking a few 10s as well. This is interesting in the larger context that real money everywhere BUT Asia has been a better seller of 5s and 10s all week once the US day got going. We’ll see if that is the case again today, but it’s very interesting to see the dichotomy between Asian (ex-Japan of course) and rest of the world real money accounts. There was a Japanese credit desk receiving in USD 30y swaps mid-session in Asia with an Asian bank receiving in USD 10y swaps, while hedge funds and RV accounts were better sellers of 10s after Tokyo lunch. JGB curve took back some of its flattening of the last two sessions, with buyback underpinning belly of the JGB curve and long end under minor profit-taking pressure. Aussie rates were under mild pressure as foreign accounts continue to look at issuing in AUD; today’s off-shore issuer of note is TD Bank, helping to pressure Aussie rates as 10y comes off another 2 bps. With return of mild pressure on EM currencies in Asia, stocks there were uniformly weaker, although losses were marginal on the session.
The European open was a quiet affair, but bunds led a minor pullback for gilts and Treasuries with dealers building in better concession ahead of buxl issuance. Ahead of the issuance, weak Spanish CPI, along with soft Italian and EU industrial production, led to a return of risk off sentiment as BTPs broke with recent tightening sentiment and core fixed income turned better bid. A Bloomberg story that ECB would confirm steady progress toward inflation but would downgrade Eurozone growth became the catalyst for a small bounce in core fixed income at the expense of peripherals. The German buxl auction met with good demand and further underpinned fixed income; on the heels of the auction, curve flattened markedly with two block sales in German schatz (2y) adding to the flattening pressure. Portugal issued 5y and 10y paper to decent demand, but a story that 5 Star is making noise against the budget proposal, speculation that they are looking for either Tria to resign (ooops) or an increase to their “citizens income plan,” neither of which will sit well with the current leadership or the EU. BTP trading has become a bit crazed (full point swings in the BTP 10y sector) with 10y BTPs being 4 bps tighter to Germany mid-morning but 6 wider after the 5 Star story and now sitting at 2 wider. Italian bank stocks are under mild pressure as well. Flow wise, there was better real money selling in US 10s (there ya go again!), RV adding 5/10s steepeners ahead of the auction, hedge fund buying of US 5s to sell UK 5y, better European bank buying of buxl, bund, and US 7s after the buxl supply, and deal-related receiving in USD 10y swaps. European stocks are mixed, while currencies have come off the boil as London morning rolled on.
Today’s calendar highlight will be the PPI number at 8:30 AM ET, where everyone will look for some comparison to Friday’s AHE data and see if we can determine that inflation has awoken from it’s decade-long slumber. The Fed will release the Beige Book at 2 PM ET, while Bullard (9:40 AM ET) and Brainard (12:45 PM ET) will both speak before the Beige Book release. Treasury will issue $23 BN in reopened 10y notes at 1 PM ET in the second highlight to this day, in what should be a telling revelation given the recent real money divide on flows and positions.
Wow, that was a weird day yesterday. What seemed like every opportunity to claw back a little and a great set up overnight were anything but. Quite simply, it was just “sell Mortimer, sell…. And go away!” Let’s try simple today: for choice in TYZ, call the range 119-19+ (and that has become a HUGE psychological level!!!) to 119-06+. IF you take out 119-06+, it could get pretty ugly, especially if that happens AFTER the 10y auction. Support in TYZ comes in at 119-09+, then the aforementioned 119-06+, 119-00+, 118-27+, 118-24+, 118-19. Resistance comes in at 119-17+, the previously highlighted 119-19+, 119-22, 119-29, 120-03. If this weird trade continues, I am going to have to drop a dime and find the Clue Salesman…going back in my hole for now….
Have a good Wednesday,
mjc