After a harrowing day yesterday, today is a bit calmer, but nerves remain frayed. Chinese/US tensions again driving the flows, with better risk off early in the session but risk on since China set Yuan. As of 8:15 ET, Treasuries are 1.5-2 bps higher in yield from their 3 PM ET marks, 3-5 bps higher from their late 5 PM levels, while US equity index futures are trading roughly 1% better ahead of the cash open.

Let’s kick off with an overnight block flattener:
*5428 TYU9 trade 129-20
*7142 TUU9 trade 107-23 5/8
Trade blocked at 5:19 AM ET…client did mis-weighted bull flattener, lifting $440K of DV01 in 7y sector and selling $280K of DV01 in 2y sector.

In general, it was a student body left/student body right night. Started out risk off as US Treasury formally declared China a “currency manipulator” (no immediate impact on policy but does kick off a long review with potentially severe prescribed consequences), but when China stepped in to support CNY today by setting the fix at 6.9683 the world tilted hard toward risk on. You get the idea. Flows heavily skewed toward futures: one person wrote “very strong buying in FV and TY contracts during the Tokyo morning, with very heavy selling of FV and TY contracts in Tokyo afternoon as PBoC stepped into FX market.” You get the general idea. Same thing during Europe, with highlight of headline beat for German factory orders (+2.5% m/m against forecast of +0.5%) but further reading revealed that orders contracted aside from huge beat in bulk orders. Futures volumes were 4.5 times average during Asian session, dropping to just average during the European morning.

Looks hard to call a top in here for rates, given that we took out some key yield support levels in long end of the curve. Most significant was this break below 1.7% overnight, as 1.74/1.71% zone had been on everyone’s radar. Looks like we have to stomach at least a target of 1.57% in cash 10s to actually complete some things. We’ll see. For choice today in TYU, let’s call the range at 130-14 to 129-15+; the range overnight has been 130-10+ to 129-15. Should not take out bottom of value from yesterday at 129-15+ or we could get a much deeper pullback (opportunity to buy!). Meanwhile, don’t know that I believe you will achieve a full extension over yesterday, maybe for rest of day the market stays below 130-03+. But we will trade 130-14 eventually, and bit higher as well, like 131-02 if we are going to make this run for 1.57% in cash 10s. Oh boy. Vol is extremely directional as one would expect and as has been the case all year on the margins. LDI accounts have been active since middle of last week, and that will continue right through this supply. It’s just so ugly out there.

Only economic release on tap today is JOLTs survey, but we do kick off Treasury’s quarterly refunding with $38BN in new 3y notes at 1 PM ET ahead of new paper in 10s and 30s the next two days. Bullard speaks at 12:00 PM ET on the economy in DC. So it will be another day of watching the China and US headlines. Good luck with that….

Have a good Tuesday,
mjc