****ADMIN NOTE: TODAY IS FIRST NOTICE DAY FOR JUNE TREASURY FUTURES, MEANING SEPTEMBER (U0) IS NOW FRONT. IF YOUR MACHINE DOESN’T SELF ADJUST, CHANGE YOUR CONTRACT THIS MORNING TO SEPTEMBER****

Markets have put in another quiet overnight ahead of what could be an interesting day in the US. After US risk backed off yesterday, markets have traded defensively on mild risk aversion ahead of Powell, Trump and Michigan number. Volume was light again with activity very sparse, even for a month end with large extensions. As of 8:15 AM ET, Treasuries are 1-3 bps lower in yield, with intermediates leading amid a general bull flattening, while US equity index futures trade marginally softer in a minor risk off move ahead of the cash open.

Treasuries were better bid from the outset in Asia, fast money accounts expecting month end buying out of Asia with Treasuries set to extend an outsized .14 years, credit by .14 years, and mortgages by .08 years. They were not disappointed, as Japanese real money lifted US 10s, while Japanese pension funds lifted 10s and received in USD 30y swaps. Asian lifer again lifted WN contracts after Tokyo lunch; the bid for the dollar against yen further supported the idea that Japanese accounts were, or would be, adding duration. Japanese banks were better buyers of US 5s, while Asian banks were back to paying in USD 5y and 7y swaps (no extension issues for those accounts). There was macro interest in flatteners in 5s10s and 5s30s in USD swaps leading up to the European open. Volume was nothing to write home about, but Treasuries steadily ground higher into the European open.

Treasuries made their highs for the session on the open in Europe, as bunds were well bid on the back of Asian month end buying in buxl and German 30y cash, with European Treasuries extending a fair .08 years. Treasuries slid with gilts and bunds after the open on some concession sales in the later two sectors, Treasuries seeing better hedge fund sales in cash 30s and USU classic contracts, but again better real money buying of 5s and 10s emerged to steady T’s just off their highs. There was small central bank buying of US Ultras and German Buxl, but no interest in mortgages (at least we didn’t hear of them selling today). The arrival of NY has seen dealer buying of 10s and portfolio account receiving in USD 20y swaps.

Locally in Asia, Japanese Industrial Production and Retail sales both printed weaker than expected, but markets largely ignored data as per usual. JGBs traded lower and steeper, with 2y yields flat on the session while 30y yields were 1 bps higher, with no support for curve as JGB extension is 0 (zero) for May. Australia ended this week’s supply with a good 5y, finding better demand for an issue that stopped .9 bps through. Kiwi rates were under pressure as RBNZ increased tapering, leaving rates in NZD 10y 6.5 bps higher (remember when owning NZD 10y was all the rage a couple weeks ago?), Aussie 10s up .5 bps, and JGB 10s also up .5 bps. NIKKEI gave back some of Thursday’s gains to close down .2% (noise), while China bounced small and rest of Asia was mixed save for a 1.5% drop in ASX.

European trade has been fairly quiet end to the week, with decent extension in European fixed income (.08 years for Euro Treasury) but small contraction in UK space (-.01 years). Data in Europe was mixed and largely ignored. Story that RBC had changed their call on the BoE and now expected negative rates by end of 2020 helped bid reds in short sterling, but long end of gilt curve has outperformed on buying from macro accounts against bunds and OATs. Decent Italian supply done, with acceptable 4y, good 5y, although disappointing 10y auction. Flows have tended to extensions across the board in peripherals, although there has been better domestic bank selling of 10y and 5y BTPs, outright and against like points on the bund curve. BOBL (5y) calendar spreads have been sold in very good size today. European equities are under slight pressure ahead of the US open, largely matching the move in US.

Today’s calendar in the US is fairly full, starting with Trade Balance and Personal Income at 8:30 AM ET, Chicago PMI at 9:45, wrapping up with Michigan sentiment at 10 AM ET. Don’t forget that Chairman Powell does moderated virtual discussion at 11 AM ET, while we will also await President Trump’s announcement on China and possible US sanctions that market currently expects will be at 2 PM ET.

Okay, one more reminder to switch your Treasury futures to September. Maybe that’s what I needed to get some clue on this market. Nope…(wait for it) looks like the same flat line and coiling that never ends even in the September contracts! At least the tools were correct in predicting we would hold in against support yesterday, stopping right on the tick (138-28+ in TYM0), but didn’t come CLOSE to any upside objectives. We have opened better bid today and market wants to tease about a move to test the upper bound in price/lower bound in yield. Everything lines up like it could: risk off, better bid for intermediates (spot where potentially most pain exists given dealer shorts), month end…. Just feels like we’ve seen this movie too many times lately and it just frustrates so much. Enough whining. For choice today in TYU, call the range at 139-12 to 138-24+, after an overnight range of 139-01 to 138-24. Support comes in at 138-24+/26, 138-18+, 138-16, 138-14, 138-09+, 138-05, 137-30+. Resistance comes in at 139-02/03+, 139-06+, 139-09, 139-12 objective, 139-16, 139-25, 140-11. Would think that month end extensions will come after data (accounts will hope for pullback) but likely to be underway before Powell speaks. We’ll see….

Have a good Friday, along with a relaxing and healthy weekend,
mjc