quick update after bank earnings and ahead of PPI (Wednesday)

Markets are watching bank earnings (BofA, GS, WFC) and waiting on PPI at 8:30 AM ET, which needs a strong print to help alleviate pressure on the Fed. Treasuries are marginally higher, risk off mentality driven by European fear again today. As of 8:10 AM ET, Treasuries are flat to 2 bps lower in yield as the curve bull flattens while US equity index futures are mixed ahead of the cash open.

Flows overnight saw better Japanese real money selling of US 10s and 20s ahead of Tokyo lunch. Asian real money was a better buyer of US classic contracts and US 30s, while Asian bank paid in USD 5y swaps. Japanese real money spent the post-lunch period paying in USD 10y, 15y, and 30y points on the swap curve. Something to mull over that has materialized over the past week is better interest to sell/lighten up in Treasuries by Japanese names. For example, Japanese real money sold yesterday during the Asian session and again this past night. Even more interesting, better real money selling/paying is coming in 10y and 20y sectors in both cash and swaps since last week as well.

Japanese LDI types have been fairly quiet for over a week now, leaving little resistance to the real money selling, but the pressure on US markets has been easily reversed when Europe arrives (of course, given the mess on the Continent). Even with the usual central bank buying of spread product seemingly every session, you still end up net better to sellers coming out of Asia.

BOJ’s 3m USD swap auction saw zero demand for the facility on the first day that covered year end (83-day operation), with borrowing seemingly going through FX markets instead; meanwhile, there has been aggressive paying in long end of JPY swap curve that is causing swap spreads to widen aggressively in JPY. Think this is related, but not smart enough or awake enough to be certain.

European session saw better bid to bunds and gilts, along with decent demand for UK 10y auction and German 30y bund supply. Bunds also supported by Greece leading peripherals wider, as shutdown looks to damage the local economy further; similar trade materializing in Ireland as well. Gamma buying for 1m and 2m expiries in bund options was a theme for a second session, ahead of the next Brexit showdown and the growing spread of COVID on the Continent. Gilt support coming from stalemate on Brexit, along with Johnson’s plans for COVID precautions.

Treasuries during London session saw macro account buying of US 30s and receiving in USD 10y and 20y points on the swap curve, while there was deal related receiving in USD 7y and 10y swaps; however, volume in Europe has been fairly quiet overall. Small gamma buying materialized in US Treasury futures after NY arrived, having cheapened somewhat by program seller of TYZ expiry during European morning.

Today we get PPI at 8:30, with huge list of Fed speakers: Barkin at 8:35 AM ET, Clarida at 9, Quarles at 10:30, Barkin (again!) at 2 PM, Logan at 2:20, Quarles (AGAIN!) at 3 PM, and Kaplan at 6 PM ET.

Time to hit send…. For choice today in TYZ, call the range at 139-15+ to 139-00+. Take out 139-15+ and this could get more interesting, and that will mean inflation is trending lower again as well! Oh boy….

Be careful out there,