It’s a dicey Monday to start this week, clearly risk off, more pressure on commodities (read: crude), and a small bid to safety assets such as fixed income but on extremely light volume in rates thus far today. As of 8:15 AM ET, Treasuries are .5 to 2 bps lower in yield as curve flattens in absence of any volume (hadn’t even trade 200K TY contracts as of 8 AM!), while US equity index futures trade 1.75% to 2.25% lower ahead of the cash open.
The crude story is all about expiration of the May contract and delivery for the moment, but speaks to the bigger issues of reigniting demand. CLK0 (May crude) that stops trading today and expires tomorrow is down 38% on the night and showing no signs of bottoming yet, while CLM0 (June crude) is “only down” 11%, as it’s the next pig in line without a place to deliver. Saw articles this weekend about the chance that Texas producers will have to PAY people to take their crude, as the storage costs would be greater than just paying someone to take the commodity. Oh boy.
Thus far the oil story is pressuring equities and other risk assets, but giving fixed income only marginal support. Friday’s late announcement by the Fed that they would conduct $15BN daily in buybacks of Treasury securities this week, halving last week’s totals and $5BN less than market expected, has left Treasuries with mild hangover since Friday. Further, their specific exclusion of the CTD for USM0 futures and WNM0 futures added steepening pressure on the curve.
Overnight saw better hedge fund buying of USM contracts and cash 10s early in the Asian session that helped reverse some of Friday’s late day steepening; however, volume was moribund throughout the Asian session. Around Tokyo lunch, Asian real money received in USD 10y swaps and added some 2s10s flatteners in swaps as well. Asian central bank was small buyer of mortgages after Tokyo lunch and added US 5s later just ahead of the European open; Asian bank was small payer in USD 2y and 5y swaps on the handover to London.
Locally, it was a quiet session in Asia. As was telegraphed by China on Friday, PBoC cut prime rate for 1y (20 bps to 3.85%) and 5y (10 bps to 4.25%), with little reaction in the market. Australia continues to find good demand at auctions, today getting large bid/cover in AUD 3BN of 11/22 TAP. Japan will issue 20y paper tomorrow, followed by 2s on Thursday. Japanese yields were flat, although 20y and 30y sector came under mild pressure late ahead of tomorrow’s supply, Aussie 10s were 2.1 bps lower in yield, and New Zeland yields were 3.5 bps lower. Equities in Asia were mixed, small better bid for China (+.5%), worse for most other majors in Aisa led by a 1% decline for NIKKEI.
Into the European open, there was a block buyer of 7500 TYM 136.5/138 put spreads for 20/64 (2:36 AM ET) and a seller of 5K TYM 141 calls also at 20/64 (2:59 AM ET) that weighed on belly slightly, especially given the lack of any volume elsewhere. There was some early dealer selling of US 10s as US supply calendar began growing while RV account sold US 10s against bunds, contrary to the popular trade of late last week. Core was under pressure throughout the session in Europe on large supply calendar, both official and corporate, this week, but found some support against peripherals as Italy (12 bps wider to bunds) has led widening move in larger risk off trade. Reuters ran a story about an ECB “bad bank” (read: repository for bad Italian, Greek, Spanish paper), but real money continues to be a better seller since end of last week in all three. Gilts under pressure as DMO will be very busy funding the government this week in 3s, 6s, 7s and likely 10s, the latter being a syndication. European equities trade under pressure, down roughly 1.5% in core and down over 2% in peripherals. After NY arrived, Libor fix disappointed market as 3ml was down 1.137 bps (1.09763%), but definitely less than market had expected; there was selling of EDK0 down to 99.28+ (-7 bps on the session!) as FRAOIS for June traded a quick 4.5 bps firmer after the setting. There has been small deal-related selling of 5s and 7s in the last hour, but we are crawling through the early US day.
Today’s only data is the 8:30 AM release of the CFNAI; remember also that Fed is in blackout ahead of the FOMC meeting April 28/29th. Then there is the buyback, 10:30 AM ET for $12BN of 0-2.25y paper and 11:20 AM for $3.5BN of 7-20y sector. That’s it for buybacks today…remember a couple weeks ago when it was seven operations instead of two??? Early call for corporate supply this week is $40BN, some already calling $50BN. Know what? I’ll buy a $60BN call….
For choice today in TYM, call the range at 139-11 to 138-29, after a pathetic overnight range of 139-06 to 138-29+. Don’t hold out a lot of hope here. Likely be bid through the cash equity open then eventually wilt into deal pricing late in the day. Repeat of last boring week. As for support in TYM, watch 138-31+, the aforementioned 138-29 level, 138-22+, 138-15/15+, 138-11+, 138-02, 137-28; resistance comes in at 139-06+, the aforementioned 139-11, 139-13/13+, 139-19/21, 139-27, 140-02.
Have a good day…
mjc