not good to be long risk when everyone tries to use the same exit….(Thursday)

Market trades risk off this morning, continuing to digest the FOMC from yesterday, but also concerned about a troubling spike in COVID-19 cases in the US, specifically in California, Florida, and Arizona. Volumes are okay, but a bit light given the apprehension and magnitude of today’s moves. As of 8:20 AM ET, Treasuries were flat to 5 bps lower in yield, with US equity index futures down 2-2.5% ahead of the cash open.

Treasuries trade as if having gone from small long 4 days ago to what feels like a large short by yesterday morning. Asian demand continues, slightly lesser today than the previous four sessions, but the normal seller at the back end of the Asian session was nowhere to be found for a second day. Maybe that was nothing more than a position adjustment for the behemoth, and not a change in the program. Last night saw early US deal-related receiving in USD 5y and 10y swaps to open the Asian session, before Japanese real money stepped in to buy US 5s, 7s and 10s outright. Asian real money took advantage of better levels to sell US 30s and pay in USD 30y swaps around Tokyo lunch, but after the break the normal Asian central bank buying of 10s and 30s re-energized the bull flattening move. Central banks also were sellers of US 2s and 3s shortly before the European open.

While gilts and bunds dragged Treasuries off their highs on concession building ahead of UK and Italian supply and a block buyer of a weighted Treasury risky (+15K TYQ 137 puts, -10K TYQ 139+ calls, +6K TYU blocked at 12:23 AM ET) also weighed on belly, Asian real money came back in for a second helping, lifting chunky amount of 10s, along with UK 10y gilts. European real money bought 3s and 5s. Treasuries pulled back slightly on RV selling of 30s ahead of today’s supply, with macro account adding 5s30s steepeners (didn’t budge the 5s30s curve which is trading at 115.5 since 5 AM ET) but since NY walked in there has been better buying of 5s and 7s from portfolio and bank types while RV has been small seller of 30s again.

Asian fixed income was bid from the outset; even with RBA passing at further bond buying during the normal time and RBNZ sitting on the sidelines as well. There was more receiving in long end of JGB swap curve, with the LCH/JSCC spread coming in further as it is pretty clear that accounts continue to unwind pay positions. There was no data or real events to speak of during the session other than a steady risk off move. JGBs closed down 1.5 bps in yield in 10s, with further curve steepening, while Australia closed down 9.5 bps and New Zealand closed 9 bps lower in yield. Asian stocks were uniformly lower, with NIKKEI off 2.8%, China down between .5% and 1.5%, Hang Seng off 2.25% and rest of Asia similarly lower.

Europe was about setting up for supply on the open, but quickly shifted to full risk off. Large buying in short sterling, both futures and conditionals such as front sep (L U0) 99.87/100.00 call spreads for 1.5 bps. ECB Member Lane’s comments about being prepared to do “anything” to revive the European economy have gotten more play as the session has worn on as well, with bunds taking the lead globally since mid-morning in Europe. Choppy trade into the BTP supply has now seen smart rally after good 3y, fine 15y, although a bit soft 7y issuance. UK 4y gilt saw a larger tail (2.3 bps) with mediocre bidding, but the rally into the supply is largely responsible for that distortion. European trade overall has been quieter, but consistent bull flattening is keeping folks on edge. European equities trade between 2.75% and 3.5% (Italy the laggard) lower in the early afternoon.

This morning brings us PPI and claims at 8:30 AM ET, but the “big” event of the day will be Treasury’s last supply of the week at 1 PM ET with the reopening of $19BN in 30y bonds.

Well, you had a nice CTA long last week; that got cleaned up painfully on Wednesday and Thursday. Then you built a nice short in 10s as evidenced by the large negative o/n repo but that was thought to be setting up for Tuesday’s reopening. Well, they didn’t cover Tuesday as we saw and 10s traded between -2.75 to -4 last night, with fails also growing. So risk off and a legitimate duration short. Hmmm, where have we seen that one before? Plus, if the large axed single seller out of Asia is done and was just raising some cash from old bond positions, who is going to help defend the shorts??? I’ll let you figure that out. For choice today in TYU, call the range at 139-09 to 138-21+, after an overnight range of 138-29 to 138-19+. Pretty bullish but that’s what most of the tools say. Will offer the caveat that one was looking to fail against 138-29 (the high overnight remember) and trade down to 138-02 (.618 back of yesterday) to see what fixed income is really made of. Support comes in at 138-21+ level, 138-14, 138-07+/08+, 138-03/02, 137-27; resistance comes in at 138-29, 139-01+, 139-03, 139-09 objective, 139-11+, 139-21.

Have a good and safe Thursday….