quiet end to month so far, but plenty of leaks to watch and plug…(Friday)


Relative order to last night’s trade as market deals with G20 summit, month end, and a lot of risk events over the weekend and into next week. As of 8:15 AM ET, Treasuries were flat to 1.5 bps lower in yield in a flattener ahead of month end, while equity futures are down .25% before the cash open. Volume and participation remainS fairly light thus far.

The overnight session was tamer than the last few, especially Wednesday evening’s affair. For the first time this week, we did not see Japanese bank buying around the handover to London, which is very interesting and comes against the backdrop of very large buying in 10s and 30s the evening before by those accounts. Are they done, and was it for month end (which makes no sense for banks), or is this a pause in a much bigger risk off affair? We did have better Japanese real money buying in 10s and 30s, at higher levels than settlement after some early hedge fund and CTA buying of TY and US contracts on the Japanese open. Asian real money accounts took advantage of the better levels to sell 10s and 5s, with almost all the flows done before Tokyo lunch. After that, we tracked sideways until the European open.

Europe was a bid affair, especially for bund contracts. An early morning drop in crude, a private downgrade of German GDP for 2019, and soft Eurozone flash CPI all underpinned bunds and dragged the rest of the EUR curve along for the ride. A potential squeeze in CTD for RXH9 contract also added support and pressures the bund calendar spread. Italy is also under pressure after a weak GDP number, adding further support to core debt. Treasuries tracked bunds, with RV buying of USH contracts, some deal-related paying in EUR 10y swaps and USD 10y swaps, a macro account buying US 10s to sell gilts and US 5s, and European real money buying buxl, bunds, and USH contracts for month end. Flows remained orderly right through the beginning of the NY day.

Preliminary (and that is such a key word for CME since they revise all the time) open interest changes showed a decrease of 73K contracts in US classics and 94K in FV contracts yesterday, indicating that the block trades were unwinds of curve trades (steepeners) and NOT moving risk in on the curve. That is rather surprising: you may have flattened a bit this past week but it was nothing more than a small retracement within a much bigger steepening. And the market took it down without a hiccup. Will watch final open interest for more detailed data and see, but this is very interesting. Seems that accounts are more interested in being in cash than anything else since the beginning of this week; if that is so, it doesn’t bode well for equities and risk over the next 31 days.

Today’s calendar includes only the Chicago PMI for data, but it will be chock full of potential tape bombs with the G20 going on in Argentina. So don’t fall asleep. As for month end extensions in USD products, Treasuries extend .11 years, agencies extend .10 years, credit extends .05 years, MBS extends .06 years, high yield (relevant right now) extends .05 years, while TIPS extend .01 years with real extension at .02 years. In Europe, the Pan Euro aggregate extends .05 years and EUR Treasuries extend .04 years, while Sterling aggregate extends .02 years and sterling Treasuries are flat.

Wish I had a good feel here, but for choice today in TYH, let’s call the range 119-19 to 119-04. Early risk is rally, but later you will start digesting the roll into December (while we settle a small $111BN bill for this week’s 2s, 5s, and 7s auctions). Key levels here to watch if you think we need a pullback (I do obviously) are 3.05% in cash 10s, 119-07 equivalent in TYH, 119-04 (last week’s settlement in TYH) and 118-27. That said, get through 119-24 in TYH and it’s “Katy Bar the Door” until we make a serious run for 2.93% in cash 10s (120-03 equivalent in TYH). Oh boy, I am bearish but it’s getting hard…

Have a great Friday and Go ‘Cats!