no rest for the weary: BoE cuts, while US and world wait on DC….(Wednesday)

More global monetary stimulus came last night in the form of BoE and Iceland both cutting base rates 50 bps, to .25% for UK and 2.25% for Iceland, while Italy readies to approve a EUR 10BN stimulus package on the fiscal front. Lagarde promised that the ECB was ready to do anything necessary to aid the crisis. Meanwhile, US remains risk off in an effort to motivate politicians to add fiscal stimulus, disappointed that nothing materialized yesterday among the rancor of Washington. As of 8:45 AM ET, Treasuries are 9-12 bps lower in yield, in a small steepener, while US equity index futures are trading 2-3% lower in gappy price action ahead of the cash open.The Asian session opened to risk off, as there was widespread disappointment in not hearing any fiscal stimulus out of Washington. A payroll tax cut for both consumers and businesses seems caught up in bipartisan bickering, while Trump administration looks at measures that might be executed without consulting Congress. Either way, US equity index futures plummeted almost 2% before Tokyo lunch. Treasuries were bid virtually without without on lighter volume; swaps were a bit more active as Japanese real money lifted duration in swaps, receiving primarily USD 10y and 30y swaps. Asian real money lifted US 30s in cash, while hedge funds tried to sell US 10s and TY futures. Before Tokyo lunch, there was a block seller (unwind) of 20K TYJ 130.5/132 call spreads at 1-30/64 outright.

Locally, Japan and Australia both issued debt, the former in new 5s and the latter in a 2031 tap; needless to say, neither issuance went well as both tailed and saw mediocre bidding interest. That’s a repeat of what we have seen in the US, with reality being that it doesn’t matter; at this point, sovereign issuance is about funding and some slippage at silly levels in illiquid-at-best markets that is effectively nothing more than noise. JGBs closed 7.5 bps lower on the session, although 20s underperformed ahead of MoF auction in that sector tonight (see above for preview). Aussie rates were 11.5 bps lower in yield on the session.

Treasuries traded sideways into the European open, but jumped to their highs of the session when the BoE cut rates at 3:00 AM ET, an hour before London opened (they didn’t move their clocks yet). The BoE also announced that it would ramp up its term funding scheme (TFSME) as well. The move to new highs in Treasuries was sold very quickly by macro accounts who were well-settled into their seats at 7 AM London time, primarily selling TY contracts and cash 5s. RV accounts bought RX against TY during this period, but regretted it by the time Lagarde spoke 90 minutes later. Japanese real money account was a fairly aggressive payer in USD 5y and 7y swaps on the pop in US rates as well. Lagarde spoke just after 4:30 AM ET, highlighting that ECB was prepared to use all tools at its disposal to combat the virus and supporting the Italian fiscal stimulus, which helped underpin sovereign markets at the expense of bunds. Italian 10s are 16 bps tighter to bunds this AM, with Greek 10s 18 tighter, rest of the bad boys around 10 bps tighter. Meanwhile Portugal 5y and 10y paper was well bid at auction on solid demand. I will say again, “this won’t end well,” but this time I have to admit there is nothing we can do about it now since the problem was never addressed in the years leading up to this crisis. There has been bank selling in gilts, anticipating that BoE may be averse to cutting further and that other stimulus will come via fiscal policy moving forward; hedge funds have been active in front end, taking profits on “early cut” trades that were delivered today and repositioning by adding belly flatteners or flys, while RV accounts have been selling both gilts and bunds to buy USTs. Treasury volume overall has tapered off greatly during the European session.

Today in the US, we get CPI and hourly earnings at 8:30 AM ET, followed by monthly budget statement at 2 PM. CPI means nothing given the move in commodities this month, but if the weakness was already filtering through to other components last month, oh boy… And of course, we get the second leg of this month’s duration offering with $24BN in reopened 10s to be auctioned at 1 PM ET. This should be sloppy and not go well; if we get enough of a concession that it DOES go well, that would be great as that would mean some good news is making its way into the market. But don’t bet on anything right now.

Not a pretty way to start the day, that’s for sure. First point to be made here is thanks to a double bottom at the lows from yesterday and Monday in cash S&Ps, you can make book that we haven’t put in a bottom. That was evident from the moment we started rallying yesterday, and confirmed by the pullback within the pullback overnight. If the market takes out the lows on this move, it is even uglier than it appeared 48 hours ago; with any fortitude, we can shrug off the early pressure from today and trade up a bit before we fail later today. If we get back above unchanged in S&Ps, watch 2898 and (prayer here) 2956 in June minis, but would be an aggressive seller against those levels. So if you want to be cute, buy here, your stop out is 2715 in futures.

On Treasuries, since we didn’t write during the crazy last two days, the low yields at .32% in cash 5s and .317% in cash 10s are very interesting— and won’t stay. Still have 20 bps as objective in cash 10s for now, but seeing some indicators that it could hit 10 bps, which would make sense if the paralysis in Washington continues. Levels are getting silly at times in rate space. But why let that stop us? So for choice today, let’s call the range in TYM at 138-23+ to 136-23. Obviously the indicators I am watching are skewed to reversing the overnight risk off trade, so I have virtually no confidence in these numbers but stranger things have happened. If we can’t shake the risk off, watch resistance above at 139-00+, 139-08+, 139-25, 140-12+, and then forget it…. As for support, watch 138-01, 137-13+ 137-03, 136-23, 136-21 (who are we kidding, get down here and buy anything you can). Enough for now, I am starting to get angry again…..

Good luck and have a good hump day,