“move along, nothing to see here….” but be very careful right now… (Tuesday)

Since a little bit of action Sunday night/early Monday, markets have traded with complete lethargy but clearly risk off. That remains the case heading into Tuesday. Treasuries traded in a 1.5 bps range overnight, only some of the usual buying keeping prices in a bull flattener for now, but volume is horrendous. At 9 AM ET, Treasuries are flat (2y concession being built) to 1.75 bps lower in yield as intermediates lead the way, while US equity index futures are marginally higher without direction just ahead of the cash open.

Treasuries saw almost no flow until after all of Asia was in, after which we saw some Asian real money extension buying of US 30s and receiving in USD 30y swaps, while Japanese real money again sold 5s but added some 7s for good measure today. Treasuries basically traded sideways after Tokyo lunch until European open. There was slightly better paying in USD 5y swaps, all deal related today. Early in London, there was official buying of WNZ ultras and cash 10s by the usual suspects, but this time London macro account used the flattening to add 5s30s steepeners in USD swap space. There was also portfolio account paying in 5y30y forwards in USD swaps. Treasury volumes stayed anemic right through the arrival of NY. There has been some small buying in 10s since NY arrive as intermediates lead the “bounce” (if you can call it that) into the Chicago open.

The Asian session was quiet, with issuance in Japan, Australia and New Zealand being the focus. Japanese 2y went fine, as did Aussie supply, while New Zealand 2028 TAP met with good demand. JGB and Aussie 10y yields were .5 bps lower on the session, while KIWI yields were down 4.5 bps, owing to the good auction and playing catch up after a day off Monday. Asian equities were mixed, barely changed across the board, with NIKKEI down .4%, Hang Seng -.5%, China mixed and rest of Asia mixed as well.

Europe unfortunately seems as if it barely noticed the opening bell ring. Italy and France lead further tightening for sovereigns, as France mulls complete shutdown of three major cities for three weeks beginning this Friday. SPG 10s were sold against Italy and against bunds mid-morning by domestic banks, while macro account bought schatz (2y) against bobls just before London lunch. Some deal-related paying in long end of Eurozone swap curve but better real money buying of bunds for month end extensions. Concession building in gilts early in the session helped spur good demand for UK 51y gilt but 3y gilt disappointed slightly, as investor demand remains in long end ahead of monthly extensions. Stocks in Europe remain under minor pressure, down between .1% and .8% (CAC).

Today’s calendar includes already released durable goods (mixed to stronger, nobody cared), home price data at 9:00 AM ET, with highlight of the day being consumer confidence at 10 AM, while Richmond Fed will also print at 10. Fed in blackout. But we do kick off month end supply with record (again, get used to seeing this every month) $54BN in new 2y notes at 1 PM ET.

We are getting close to decision time here in long end of Treasury curve. As pointed out yesterday in TYZ, 138-30+ is both .618 of the sell off since mid-October AND equivalent measured move bounce to the trade off the larger sell off from Sept 3 to Oct 7 range. Also, open interest in USZ futures was down 12K yesterday in a bull flattening rally (FV was down 14K), as some of that massive short in USZ futures looks to be making an effort to cover outright and on spread against FV longs. Last thing, we get .10 extension for month end in Treasuries.

So there you go, something for everyone. The big decisions are coming close. In USZ futures, the levels are 174-17, which is .618 of the recent selloff (since October 15) and 174-22 is the measured move equivalent of the bounce 10/7 to 10/15; the equivalent in TYZ come in at 138-30+, as we have been pointing out since yesterday. Bears will sell against that, while bulls will look to add on a break of those levels. It’s a tough call, although says here that signals seem to indicate we are not “entering a new range” and should break through the upside in price with 10y yield looking to move toward .70% and 30s to 1.45% before reality sets in when Treasury announces new quarterly refunding amounts next Wednesday (first day of FOMC meeting, by the way!).

So for choice today in TYZ, let’s call the range at 138-30+ to 138-17+, with the range thus far at 138-25 to 138-18+. Support comes in at 138-21, the 138-17+ objective, 138-12+, 138-08, 138-01, 137-25/24; resistance comes in at 138-30+ objective, 139-01+, 139-05+, 139-11, 139-15. If they would be nice enough to offer some vol today, and IF you have a view, would be buying synthetic call (or put, if bearish) against that 174-17/22 level in USZ. Use USZ options that have 24 days to expiration.

Have a good Tuesday,
mjc