A little better performance by risk overnight but don’t think this is anywhere near done. Markets are trading risk on this morning after Trump comments late yesterday have given accounts chance to clean up, or be greedy and hope the storm has passed (it hasn’t). However, fresh comments just as NY arrived from Chinese envoy Cui that there are no scheduled official talks between Xi and Trump “yet” has dented some of the risk appetite. As of 8 AM ET, Treasuries are 2-3 bps higher in yield than 3 PM settlements, but flat to their 5 PM marks, while US equity index futures are up marginally ahead of the cash open. Exchange trading pits will close at 1 PM ET today, cash closes at 2 PM, and electronic markets for futures close normal time (boooo!) at 5 PM ET.

Flows overnight saw Asian and Japanese real money again offering 5s and 10s in USTs, looking more to get lifted out on upticks as opposed to hitting bids aggressively. Asian bank paid in USD 5y swaps, while selling UST 10s outright, and hedge fund was again on the prowl in 2s5s and 10s30s steepeners in swaps. A block buyer of Ultra 10s (UXYU9), lifting $200K of DV01 in 10s at 3:06 AM ET, helped underpin Treasuries before the Cui comments brought out some fast money short covering in belly (mostly 5s and TYM contracts) as NY traders arrived. Bunds led European rate backup overnight, with some deal-related selling in bunds and paying in EUR 10y swaps, while fast money sold bobls in lock-step with shorting gamma into 5y tails in EUR swaps (hmmm, that may sting if we turn risk off in the US). Good buying in BTPs after Salvini comments seemingly show him softening his demands has also weighed on core as well. Better retail sales number, May’s resignation, and general risk on have weighed on gilts this morning, with macro account adding flatteners and selling 2y gilts outright.

Volume is optically firmer than reality, as calendar spread activity picked up markedly during Asian session, with only two more real trading sessions in Asia before First Notice Day for Treasuries (i.e., Tuesday night and Wednesday night US time). Here are the “pace of roll statistics” as of yesterday’s close:
*TU: 44% of open interest rolled from June to Sept (11.4% done yesterday)
*FV: 37% rolled (15.4% yesterday)
*TY: 25.5% rolled (14% yesterday)
*UXY: 29.6% rolled (14.3% yesterday)
*US: 28.9% rolled (12.2% yesterday)
*WN: 31.8% rolled (15.2% yesterday)

So yesterday made up some ground in the pace of the roll, after the process was moving well behind historical norms given market positions and conditions (see Weds commentary). First Notice Day is next Friday, so there are still three days to get roll done before delivery process begins in earnest. Watch the TU on that front; more about it next week. Calendar spreads are still in the main slightly expensive, although have cheapened a bit this week. Most analysts still are bearish on current calendar levels outside of US classic contracts.

As for market today, the 125 strike will act as a draw as we get closer to 1 PM ET, UNLESS we actually take out yesterday’s high in TYM (125-07), in which case you will make a run for 125-16, a strike that has 54K open call positions in expiring TYM serial. Other than that, the rest is just noise. So for choice today in TYM, going to call the range 125-23 to 124-28+, while the low overnight is down at 124-27, just holding above the single prints that run down to 124-25+. There are several assumptions in that high level at 125-23. However, there should be an effort to exit risk early in the US day and that could force the hand of some weak positions. Need to get above 2843.0 in E-mini futures (currently at 2832, with a high of 2839.5 overnight), while if you take out 2825, the pain will become palpable. In a second scenario, the range comes out at 125-06 to 124-22+. If we take out 124-28+, then that latter scenario will play out, but it just feels ugly out there right now, and don’t fall asleep on the risk of FTQ in rate markets.

Good luck with this short day and have a great/safe holiday,
mjc