put a pin in this and call it a week… but first a couple observations (Friday)

We begin this final day of a brutal week better to risk off, as we have been most mornings this week. And as usual, we’ll see how much stocks decide to rally back. After China demanded that US close its consulate in Chengdu, there was risk off move in USD equity indices, but we have since bounced off the worst levels of the night. As of 8:30 AM ET, Treasuries are flat to 1 bps higher in yield while US equity index futures are marginally lower ahead of the cash open.

It has been such a brutal week that there just isn’t anything to update each morning. That said, guess we can highlight a couple things and move onto the weekend while we wait to see what next week brings.

The only, and I do mean ONLY, interesting thing overnight in yet another boring session during this long week (yes, another Japan holiday) was some very axed receiving interest on the London open in USD 2y and 10y swaps outright along with some 5s10s and 10s30s flattener interest as well in swaps. Heard the outright was real money and the flatteners were macro funds. The outright receiving coincided with confirmation of the Chinese demand re the consulate.

Interesting that swap spreads in US 30s have continued to widen since Dudley comments yesterday morning about Fed extending duration of bond purchases. Yesterday morning’s talk was about contrasting calls from Barc’s (tighter 30y spread trades) and TD (wider 30y spread trades), with TD looking to be the beneficiary of Dudley’s musings.

Wish there was something to write about Futures or Treasury flows in outright or options, but there is nothing to talk about there, except today’s expiration which Mike covered yesterday (risk is a 140-trade in TY, and it looks like that will happen). Maybe Monday there will actually be something to write about…. There was Asian bank paying in USD 5y swaps before European open, the normal sizes and hedges, with small Asian central bank buying of front end. Treasuries pulled back in sympathy with selling of bunds and gilts on strong data releases (okay, not as negative as recent US releases!): French and German PMI, UK retail sales and PMI. This makes second consecutive session where we have not heard about buying in long end or spread product, but remember that it is basically a holiday week in Japan. They will be back on Monday, although there is distinct possibility that they pull back on the reins slightly with quarterly refunding two weeks out.

Today brings us options expiration for US Treasury futures (August serials) at the Board. Here are some open interest numbers by strike:

 US                                       TY                                         FV
21,000    180.00   10,000     10,000    139.25   22,000      14,000    125.25  12,000
2000    180.50      4000     62,000    139.50   32,000***  10,000    125.50  15,000
17,000   181.00      4000*** 10,000    139.75        500      31,000    125.75  10,000***
4000   181.50        100     55,000    140.00        200      10,000    126.00       100
14,000   182.00        100     10,000    140.25        100      13,000    126.25         0
***denotes at the money as of Friday at 8 AM ET.

As you can see, the high open interest strike is right here across the board (USU trading 181-03, TYU trading 139-18+, FVU trading 125-25), but the high disparity strike for TYU, that I may add has not been traded since September became the lead month future, is up at 140-00; there are 55,000 shorts there in a very quiet and illiquid market that are just begging to spend time worried about pin risk.

So, for choice today in TYU, going to call the range at 140-06 to 139-16, after an overnight range of 139-25 to 139-17+. Need to put a sell tail on the profile here that should be rejected. If it does get rejected as it should, watch out on the upside. We are also owed a retest of the high overnight up at 139-25, which was a fairly important resistance level, but if tested again will fail and follow through for a test of the strike. Seems simple enough. The only thing missing is the spark. While there are numerous dire predictions running around out there on equities, as has been the case for a painful 16+ weeks now, the reality is that there is enough going on in the world that we could get a minor safety play today and see some profit-taking in stocks. We’ll see. As for levels in TY, support comes in at 139-16, 139-11, 139-07, 139-01+, 138-28; resistance comes in at 139-22/24, 140-00, 140-06, 140-08, 140-14.

Lastly, before anyone calls me out, the last time we wrote anything last week was all about the pullback. That may well come Monday, but this week has been all about grinding out those weak duration shorts in an otherwise dead market. Look at volatility and it’s gapping patterns this week (see Andy Carolan update from Wednesday). It’s just pain and go away these days, that simple.

It gets more interesting (he says while praying) next week with a major supply dump (all month-end note supply done by Tuesday afternoon!), and then the FOMC, and then month end. So here’s hoping there is reason to write something relevant next week.

Have a relaxing and safe weekend,