more BoE easing calls amid a mild risk off tone support global fixed income (Wednesday)

A mild risk off tone since yesterday’s news reports of US keeping Chinese tariffs in place was further supported by soft data in Europe and further calls for aggressive easing in UK to keep global fixed income underpinned throughout the evening. Approaching some key resistance levels in gilts and Treasuries here, so today could be a fairly seminal day for early in the year. As of 8 AM ET, Treasuries are .5 to 2 bps lower in yield as curve bull flattens for now, while US equity index futures are mixed but very little changed ahead of the cash open.

Market kicked off the Asian session with some small CTA buying of TY and US contracts that underpinned Treasuries amidst other reports that Trump administration was drafting rules to block product sales to Huawei. Asian banks and RV accounts used the early uptick to sell 5s outright (banks) and pay in USD 5y and 10y swaps (RV), in the case of 5s against receiving in USD 30s. As sovereign supply in Australia (2024 tap) and Japan (new JGB 5y) got digested, Treasuries found better buying, with Japanese real money receiving in USD 30y swaps while other like accounts lifted spread product. There was also deal-related receiving in USD 5y swaps, along with selling of 30y spreads by a levered account. Treasuries ground quietly higher into the European open. Locally, JGBs and Aussie rates were under early pressure as concession was built for official issuance in both domains; the JGB 5y auction was the strongest in over a year and the Aussie 2024 tap met with very aggressive bidding, as good buying emerged after the supply in both areas, with first round of 2020 supply in both countries ending on a positive note. JGBs rallied .75 bps in 10y space, with Aussie rates rallying 4.5 bps and Kiwi yields being pulled 1 bp lower in sympathy. As for equities, the risk off sentiment resulted in local bourses being down between .25% and .75%, nothing big but no great joy last night.

The European session saw early pressure on Treasuries, highlighted by a block sale of 3518 TYH0 for 129-07+ at 2:16 AM ET, client dumping $290K of DV01 in the 7y sector. The pressure on Treasuries was very short-lived though as seemingly everything out of Europe is either risk off and/or fixed income friendly. In-line final GDP for Germany printed at +.6% for the year, but lowest growth in over six years; UK CPI missed badly; and, BoE dove Saunders raised the ante ahead of policy meeting by arguing that aggressive steps are needed given limited BoE policy room, as market interprets his words as calling for more than just a 25 bps cut (crazy!). Gilts rallied a point before pulling back slightly, underpinning bunds (up 1/2 point) and Treasuries (up 1/4 point on the highs). There was fairly aggressive upside (call) buying in sterling reds and greens driven by the continued dove drum beat, along with hedge fund buying of belly in gilts; CTAs bought RXH on the break above the double top at 171.43; there was deal-related buying in belly of both gilts and bunds. Even a technically uncovered bund auction with a large tail did little more than give accounts better levels to buy bunds before taking out the highs from earlier this week. Treasuries traded quieter in Europe, highlighted by buying of FVH 119.25 calls on the screen for 12.5/64s (7K) and TYH 130.5/131 call spreads for 5/64 (10K, maybe related to this 130.5/131/131.5 call fly that was lifted over 100K times in the last week). With the arrival of NY, there was better hedge fund selling of 10s and a smattering of TYH contracts that has taken us off the highs. There has also been some deal-related receiving in USD 10y swaps in the last hour. Equities have bounced a bit since the BoA earnings, despite GS missing, as European equities are now closer to flat on the session, at their best levels of the night.

Today in the US, we get PPI and Empire State Manufacturing at 8:30 AM ET, with Beige Book to be released at 2 PM ET. Fed speakers include Harker at 11 AM ET, Daly at the same time, and Kaplan at 12:00 PM ET. There ya go, not too much today.

After two days of running in place to start the week, the overnight session seems to be throwing down the gauntlet for our first tough decision of the new year. You have finally rallied up to important resistance zone in long end and intermediate sectors of the Treasury curve, so now we will see if last week’s technical patterns hold (and we break lower) or if we have a couple bad signals and are about to do a painful squeeze (flashbacks to the pain of 2019 way too early!). You also satisfied the outside day reversal patterns in TUH and TYH on this trade overnight, leaving you with double bottoms in FVH and USH that seemingly call to be retested. For now, you have to respect this short squeeze within the larger technicals of what should be a selloff to at least 2% in cash 10s (2.48% in 30s). But pay close attention today because the situation is fluid. For choice in TYH today, call the range at 129-16 to 128-28. A settlement in TYH below 129-08/10 level would be key for the bears, taking out 129-17+ would likewise be key for the bulls. Support in TYH comes in at 129-04, 129-01+, the aforementioned 128-28, 128-25, 128-21+, 128-19, 128-14, 128-11, 128-04+; resistance comes in at 129-16/17+, 129-26, 129-30+, 130-00+. Gamma got slammed yesterday, first OTC and then led by the exchange as if everyone is right that the Fed is on hold for the rest of our lives, or at least two years, then gamma has to trade under vega and the curve has to flatten, both of which explain the aggressive selling in gamma. Not ready to step in front of that one right now and CERTAINLY not willing to join the parade. This position will turn to pain soon enough…. Stay in the outrights for now unless you have something to hedge in gamma space.

Have a great hump day,