Six days ahead of the FOMC meeting and markets have yet to enter the pre-Fed calm ahead of what promises to be an interesting meeting and press conference. Geopolitical concerns in Hong Kong, Britain, Italy, not to mention torpedoes hitting tankers in the Gulf overnight, and the continued US tariff tantrum all have kept the markets on edge. With the attack on tankers in the Gulf last night, risk ran for cover before recovering slightly in the last 2 hours. As of 8:15 AM ET, Treasuries are flat to 1.5 bps lower in yield, led by the front end (as usual right now), while equity indices are (somewhat amazingly) trading marginally firmer.

Treasuries flat-lined through the early Asian session, trading unchanged to 1 bp lower in yield through the Tokyo lunch. Flows were light early in the session before catching a bid on the Hang Seng open, fixed income underpinned by weak payroll report in Australia, with central bank selling of 5s outright and against 2s on the curve, while Japanese real money sold 30s ahead of supply in US today and to make room for JGB 30y issuance. After Tokyo lunch, activity picked up markedly, heavily skewed toward real money buying 7s and 10s outright on the curve and receiving in same tenors on the USD swap curve, both outright and against USD 5y and 30y swaps. Asian bank again bought 5s and was a small receiver in USD 5y swaps. Hong Kong was the main focus of market early in the session, with Hang Seng down over 1.5% at one point before halving the loss, but still weighing on rest of Asian bourses, those indices eventually closing mixed on the session. Locally, Aussie 10s rallied ahead of the move in Treasuries, while JGBs traded better earlier before stumbling on a soft JGB 30y auction (lowest bid to cover since 2017 although bidding levels were fairly firm. US 30s came under pressure after the JGB 30y supply and have underperformed since.

The big event in Europe was the attack on two tankers in the Gulf that were headed for Japan; press reports were that at least one was hit by a torpedo and Iran was immediately identified (far from confirmed) as likely culprit. Eminis and all risk broke to the lows of the night, while Treasuries were bid aggressively led by front end, which took out earlier highs while 7s through 30s stopped 3 bps short of those low yields from overnight. RV accounts used the pop to add shorts in the WI 30s, Hedge funds added 5s10s steepeners, while real money used the back up in long end to add some 10s. Bunds were bid on the attack in the Gulf, and saw better real money buying throughout the morning. Ireland issued 10y notes to good demand but not very aggressive pricing. BTPs supply actually went well, resulting in BTP tightening across the curve and helping peripherals outperform. European dealers were buyers of BTPs, domestic banks took profits on long BTP 10s, and RV sold SPGs to buy BTPs, alll after the supply. Gilts have been the star this AM after Labour’s effort to give Parliament control of Brexit was defeated yesterday, with first round of Tory leadership contest taking place today. European equities have traded mixed but little changed since NY arrived.

Today in the US, we already got import prices, and weekly claims data at 8:30 AM ET, largely a nonevent. That’s about it for the data/events calendar. Fortunately, we will get $16BN in reopened 30y (first reopening of the May refunding) at 1 PM ET that will keep us all from paying too much attention to the Open for now….and Fed is in blackout of course.

While markets are theoretically in the blackout/wait period ahead of the calm, you certainly can’t tell it by the anxiety on trading desks. There are any number of geopolitical risks that all point in one direction, that direction being the pain of a risk-off steepener trade with a bid to the dollar. If you don’t believe me, just look at the trade mid-morning yesterday when risk took a seat, curve rallied, reds led funding curve, and upper left went bid largely without an offer for thirty minutes. The structural pain positions remain the same: short funding, short vol, short risk; in essence, they are one in the same across all asset classes. We are 10-15 days from the next month end washout, but remember that this one is a quarter end. Keep those seat belts buckled. For choice today in TYU, call the range at 127-12 to 125-25+, with early risk to bounce and later risk is to sloppy 30y reopening. Resistance levels in TYU come in at 127-09 (overnight high and daily pivot resistance), 127-12, 127-16, 127-20 (see a pattern ironically), 128-02; support comes in at 126-30 (daily pivot), 126-25+, 126-19, 126-10+, 126-04+. Think the auction struggles here unless you get much closer 2.65% in WI30s (currently at 2.615%), and even that may not help much. I’ll take buyer’s strike even though RV has been working at getting short the issue since mid-session yesterday. Market pivots around front end these days so let’s see.

Have a great Thursday and let’s work on watching some golf today……
mjc