Where do we start? Well, volume was lighter overnight than it had been in over a week as we head into Friday, but there is no sense that the market is taking its foot off anyone’s throat. With fixed income bid in small risk off trade elsewhere, vols are better to bid as usual and market is skittish at best. As of 8 AM ET, Treasuries were 2-3 bps lower in yield, with long end lagging again, while equity indices are marginally lower ahead of data and cash open.
The Asian session was a much tamer affair, with Treasuries basically flat-lining the entire session unchanged to 1 bps lower in yields than the 3 PM ET marks. There was small buying by Asian bank in 5y sector, some hedge fund adding of 5s30s steepeners after the Tokyo lunch and some RV buying of new 30s. Central bank lifted 3s, sold 10s, and added more spread product but in social sizes at best. Although it had little impact on rates, there was much talk about the two block trades in FV options: 20K FVQ 116.5/116.75/117.25 put trees lifted for 5/64 and 20K 116.5/117.25 put ratios lifted for 7.5/64s, both a potential interesting way to fade yesterday’s bid to USD rates volatility. Locally, more banks calling for RBA rate cuts underpinned Aussie rates, with Aussie 10s rallying 3 bps, marking Aussie 10s some 9 bps lower on the week; JGBs rallied anotehr 1.5-2 bps across the curve with buyers materializing after yesterday’s disappointing JGB 30y auction. Asian stocks were mixed, except for the Shenzhen that lost 1.8% and the Shanghai lost 1% after China reported slightly disappointing May IP.
Europe has been a quieter session highlighted by CTA buying from the outset in bunds that took that sector to yet another all-time low yield of -0.267%, bringing in additional buying from asset managers that has helped flatten all the Euro govie curves this morning. Macro account took advantage of the higher prices to sell blocks in RXU (2000 at 171.90) and OEU (3031 at 134.13), which did little to dent the bid, with Euro rates effectively trading sideways since the market repriced. Technical buying in BTPs underpinned peripherals, while gilts have underperformed on some profit-taking and no fresh news or insights on the political turmoil in the UK. Treasuries were dragged higher by the move in bunds, volume light with only sporadic RV buying in 5s and some fast money short covering in TYU contracts.
Today’s calendar will focus on retail sales at 8:30 AM ET and Michigan at 10 AM; in between, we will get IP and CU at 9:15 AM. That will be it and the market will be left to its own (ugly) devices.
This has been a brutal week and it doesn’t look like it is going to end anytime soon. I said it was ugly yesterday; I was wrong, it was pure torture. And today will be no different. Those block trades in FVQ that I referenced above: 2/3 chance this is stop-out, but if it wasn’t, just that much more pain for the guys who are getting squeezed! There is no liquidity in rates markets, and there is barely any more than that in other asset classes. Wait until somebody pulls the veil back on the short vol positions (aka, via options and via funding) in equities. This trade took place at the end of the first quarter, and we have been sounding the alarm about the end of this quarter. Guess what? Came early, meaning wait until it comes time to roll all the heavily levered stuff a week or so from now. Let me know if you want any more uplifting thoughts later today. Okay, enough, for choice today in TYU let’s call the range 127-25 to 127-08. Yes, that is quite the extension reach at 127-25, but you have to squeeze people and that will get the 10y yield sub 2.05%. Resistance comes in at 127-23 before that, then 128-02, 128-05+, 128-10 beyond there; support comes in at 127-08/8+, 127-02+, 126-26, 126-19. Number now….
Have a good weekend and carry your umbrella today,
mjc