It was a normal “night before” trade as market prepares for the last NFP report of the year. As of 8 AM ET, Treasuries are flat to .5 bps lower in yield than the 3 PM ET marks from yesterday, while US equity index futures are small better ahead of the data and the cash open.

Couple trades/observations from overnight before the last fun day of the year (don’t kid yourself, next Wednesday will be boring, although the trade after may not be, see below):
*Another Treasury fly blocked during Asia (8:53 PM ET) with client selling the wings to the tune of $450K in DV01, but this time in the front end:
-11K TUH sold at 107-25
-19K FVH bought for 129-08+
-6K TYH sold at 129-08+.

*Options overnight were skewed to better bearish rate structures as Eurodollars saw short Jan 82 puts (1.5 on 20K) and 83 puts lifted on blocks and better bid on screen; Treasuries saw slightly better interest to buy puts as well, but with more interest to sell calls than in ED complex.

*After being well-supported through most of the Asian session, Treasuries came under pressure when China announced a waiver for some US ag products. Flows returned to recent norm last norm: Asian central banks bought 7s and mortgages, but interesting they were actually small sellers of 5s to buy 10s rolling out the curve; Japanese Lifers bought WN contracts and were again sellers of JGB 30y and 40y, exactly as the BOJ hopes; Asian real money was better seller of 10s while Japanese real money was slightly better buyer of 10s and 30s.

*Europe was the usual noise, truly focused more on US NFP than anything else. European real money was better to sell but that selling ran into better RV and macro short covering in bunds and TY contracts mid-morning in London, while Japanese lifer lifted a few more WN contracts a little before NY walked in. There was some US real money receiving in USD 5y swaps and outright buying of TY contracts that took Treasuries to their highs of the night in the last hour, but since then we have drifted back to virtually unchanged from 3 PM ET marks.

*Last thing: preliminary open interest for yesterday shows 103K drop in TY, 47K drop in FV, and 7K drop in US; we will check final OI in a couple hours to verify these numbers. Point is, like we said Tuesday when OI dropped huge after the big rally, it seems that people are just trying to reduce exposure on both sides of the market. If that is correct, risk really to this market trading higher (lower rates) at some point next week (hmmm, FOMC meeting huh?).

Aside from the NFP report at the bottom of the hour, we will also get Michigan at 10 AM ET. Fed is in blackout period and there is no supply on the Treasury calendar today; however, if it gets quiet, don’t be surprised to see someone try to force a backup in rates ahead of 3/10/30s supply next week.

As for today, the key levels in TYH are up at 129-29 and down at 128-26+; for choice fade the first move to either of those levels, but after a small retracement move, a second test could kick off a move good for 8.5 bps. That said, would not be surprised at all to see a test of 128-26+, only to later find out that is the buy of the quarter, but not convinced. Every survey I have seen in the last two days shows interest in trading this number at the lowest level it’s been in recent memory. It’s going to be an interesting next few weeks, and I don’t think it will be quiet. Would be looking to add some Treasury gamma later this afternoon. All right, for choice today in TYH, I am going with a range of 129-23 to 128-26+. Support here comes in at 129-04, 129-01+, the 128-26+ level, 128-17, 128-14, 128-05+; resistance comes in at 129-11/12+ (right here), 129-21, 129-23, 129-29, 130-00+, 130-10+.

Good luck today…..
mjc