monetizing some positions since late yesterday…and quadruple witching (Friday)

Markets have been in consolidation/retracement mode since late in yesterday’s session, with that theme largely continuing overnight. If asset classes were flush with easy money in the post-FOMC run up for all asset classes, the trade since yesterday afternoon has been about taking a few chips off the table and forcing out some of the weak purchases since then. Volume has been fair at best, with activity somewhat muted. As of 9 AM ET, Treasuries were 1 to 1.75 bps higher in yield but 3 bps off their worst levels of the night, while equity index futures are marginally lower.

The Asian session saw some reversing of yesterday’s US late-day bear flattening, with better Japanese real money buying of FV and TY contracts; soft Japanese PMI helped further underpin Treasuries, as Asian bank lifted 5s and Asian real money bought 3s outright and added some 5s30s steepeners just before the European open. Japan Manufacturing Markit PMI was a disappointing 49.5 vs 49.8 last, contracting further this month, as JGB 10y rallied 3.5 bps, at best levels of the night tagging -0.195% yield before settling 2.5 bps lower on the session. Japanese 20y led the curve, with pension and lifer buying supporting the long end. Aussie 10s also rallied a further 2 bps at their best levels of the night before closing 1.5 bps lower in yield (1.277%). Asian equities were mixed, NIKKEI down .95%, China up on mainland bourses but Hang Seng lower, and rest of Asia mixed.

Into the European session, there was hedge fund buying of cash 10s and USU contracts that helped further flatten the US curve into the handoff. The European session has been dominated by stronger French PMI and modestly improving (still contracting though) German PMI data; Treasuries have been pulled off their best levels by the pressure on European rates since shortly after the European open. Of course, Italy remains the outlier, 1.2 bps lower in yield for 10s on the session, and 4 bps tighter to Germany. Treasuries saw macro selling of 7s and TYU contracts, RV selling of 30s against buxl on the back of a cut to German Q3 issuance talk (interesting), macro selling of 10s to buy gilts, and central bank buying of US spread product, only marginal interest in MBS though. Bunds were hit down on the PMI reports, but caught a bid on the geopolitical tension in the Gulf. In the UK, higher borrowing costs needs were basically ignored, although the belly of the gilt curve came under pressure from hedge fund selling outright and RV selling against short tenors. European equities trade mixed, barely changed on the session.

Today in the US, we get Markit PMI data at 9:45 followed by existing home sales at 10 AM. Mester and Brainard appear at “Listening Event” in Cincinnati at 12:00 PM ET, while Mary Daly will host a podcast on community development at 3 PM ET. Today’s big event for the market will be the serial expiration for Treasury options today. Here is open interest as of yesterday’s close.

US                                                TY                                                     FV
CALLS    STRIKE     PUTS            CALLS    STRIKE     PUTS                CALLS    STRIKE       PUTS
5000         154.5        5000             14,000    127.00     38,000                44,000      117.50      23,300
8000         155.0        5000             16,000    127.25     19,000                38,000      117.75      14,000
6000         155.5***    3000             34,000    127.50     16,000                38,000      118.00***    8000
1000         156.0        1000             12,000    127.75*** 16,000                15,000      118.25        1000
2000         157.0          (0)               58,000    128.00     11,000                15,000      118.50           87
7000     128.25        3000
23,000     128.50         280
***at the money as of 9 AM ET Friday

All right….already a sleepy day. You did the “expiration” trade yesterday when you traded 8/32s through the 128 strike that had an 18K disparity; you then got what we were owed on the trade up to 128-08+. Had we ticked up a couple more ticks we could have had a free ride up to 128-24. That opportunity is now passed. There really isn’t a draw anymore, but it does look like the fight will be between a trade to 127.5 and 128 strikes to call it a day and pin a strike. For choice today, we’ll take 127-16 trade. So let’s call the range in TYU for the rest of the day at 127-28 to 127-16, after a range thus far of 128-00+ to 127-17+. Or we may just go to sleep here. If we can get back down to 127-16 enough, we may be able to get some follow through down to 127-08, but there doesn’t seem enough there to squeeze after we were at those levels earlier this week. Other support comes in at 127-03 and 126-29+. Resistance comes in 128-05+, 128-12, and 128-20. We’ll get around to those synthetic call structures next week….

Have a great weekend,