***ADMINISTRATIVE NOTE: TODAY IS FIRST NOTICE DAY FOR MARCH FUTURES, SO IF YOUR SCREENS DON’T RESET ON THEIR OWN, SWITCH YOUR LEAD CONTRACT FOR TREASURIES TO JUNE 2019***

Markets are trading slightly to risk off this morning after a miss in Chinese PMI and disappointment over Trump abruptly walking away from the North Korea summit without any agreement. Volume has been good, largely due to month end activity during the Asian session, with activity slowing ahead of the US open. As of 8 AM ET, US equities are very small lower, while Treasuries are 1.5 to 2 bps lower in yield, led by the belly.

We opened the Asian session slightly better bid in Treasuries, anticipating some duration adding out of real money today. Japanese real money accounts were early buyers of US 10s and 30s, as the curve flattened initially. Soft readings out of China for both PMI and non-manufacturing PMI brought out more buying in a risk-off move, with Asian real money lifting 30s and Asian banks buying 5s. Some small Asian central bank interest in 2s and 5s materialized shortly after the Tokyo lunch as Treasury curve unwound some of its early flattening. Asian real money received in USD 10y swaps, while hedge fund added 7s30s and 10s30s flatteners ahead of the European open. Locally, the JGB curve flattened on good month end buying, although for some reason investors skipped the 20y sector as underperformance in that sector left a noticeable kink on the curve. MoF issuance of 2y notes went well, but later session saw dealer selling of 1-5 year sector ahead of what is feared to be a sloppy buyback operation at the start of March. Aussie bonds were bid early, but faded on a strong Q4 capex print (+2% vs expected +1%). As for equities, Asian bourses drifted lower, with China mixed (down small except Shenzhen which was up small) and rest of Asia down small.

Month end buying was the theme to kick off the European session, with better buying interest out of Asian real money in bunds, and to a lesser extent USTs; conversely, gilts actually saw Asian real money selling to match the contraction (.02 years) for the gilt index this month. The buying was largely concentrated in the 10y sector, although there was some buying of buxl as well. Once that noise cleared, gilts stabilized from their early weakness while bunds came under pressure on higher Spanish and German flash CPI data being above expectations; Treasuries chopped around in a 3/32s range for the next five hours. Some buying of fixed income and selling of equities in Europe for rebalancing was wrongly interpreted as risk off, but there was no reason to add risk after German import prices, French CPI, and UK housing prices all managed to miss estimates. Treasuries bounced again as US/NK summit collapsed, but volume was missing. Overall, there was better European real money buying of 10s, very small central bank buying of new 7s, some minor RV effort to reengage the 7s30s flattener in USD swaps, and better macro selling of US 30s outright. Bunds have continued to underperform on macro selling of bobls to buy UK 5s, macro selling of schatz and bobls outright, and better RV interest in EU swap curve steepeners. European stocks are marginally lower after the rebalancing, but we’ll see if fresh buying shows up for the new month.

Today’s data includes our first look at Q4 GDP and weekly claims at 8:30 AM ET, followed by Chicago PMI at 9:45, along with KC Fed at 11 AM. It’s a big day for Fed speakers: Clarida at 8 AM ET before the NABE; Bostic at 8:50 on the economic and housing landscape; Harker at 11 AM on the economic outlook; Kaplan at 1 PM in San Antonio; Mester at 7 PM ET on Women in Economics; and lastly, Powell at 9:15 PM ET (I will be sleeping) on economic developments and longer-term challenges to the economy. One last time for review, month end extensions show USTs extending .12 years (.09 avg, .11 avg for February only), agencies extend .07 years, credit extends .07 years, MBS extends .04 years, with the US aggregate extending .08 years and TIPs extending .07 years (real terms .13 years). Euro aggregate extends .07 years, Pan Euro Ts extend .07 years, Sterling aggregate extends .02 years, Sterling Ts actually contract .02 years. And don’t forget major rebalancing flows the market expects (so tired of that…).

So we got a break in Treasuries yesterday, and today we have taken back much of it. I guess it makes sense here to point out that open interest fell a good amount across the curve in Treasury futures yesterday, implying that yesterday’s sell off was liquidation, and theoretically is a technical fade. Argghhh, while we are getting a realized move (okay, maybe a little stretch) each day, we are NOT getting a realized return over more than a day, making it realllly hard to be long gamma. Still think that at these levels it makes sense, the daily effort to steepen the curve (whether bullish or bearish) seems to validate that idea, but it’s awful hard to pitch the idea, especially when a certain oversized hedge fund has decided to punt a few yards of gamma yesterday as well! Argghhh. Okay, so let’s keep it simple today. Remembering that June is now the front contract, let’s call the range in TYM9 for choice at 122-18 to 122-03. You actually had a reversal day lower in TYM yesterday so this could get interesting. Feels like you are owed a spike up but need to stop below 122-19 if you are going to keep yesterday’s pressure on the market. As for support in TYM, watch 122-11+ (daily pivot), the aforementioned 122-03, 122-01, 121-30, 121-26+, 121-19+; resistance comes in at 122-18/19, 122-22+, 122-28, 123-04, 123-13+.

Have a good Thursday,

mjc