quiet market, so don’t tell anyone about the front end pressure….(Tuesday)

Risk on remains the theme, along with lighter summer volumes, as equities rally, spreads tighten, and global fixed income trades softer for a second consecutive session. Curves are flattening, in some cases markedly, in core fixed income markets, as funding is quietly starting to be an issue again and real money looks to sell belly/front end globally. As of 8 AM ET, Treasuries are 1 to 1.5 bps higher in yield with the curve flattening smartly while equity futures trade marginally higher ahead of cash open.

Sellers were at the fore on the Asian open, with Japanese real money wasting little time selling US 5s and FV contracts from even before the Japanese open; a hedge fun then joined in to sell TY contracts (over 5K traded at 120-02, huge volume for that time of day). To be fair however, the Asian open was about the high water mark for volume on the session, as normal summer pattern ensued after Treasuries based below yesterday’s lows and then traded sideways for the last four hours of the Asian session. As the yen rallied early, Japanese lifers were seen selling US 30s as well, with Asian bank buying cheap (on the curve) 5s later in the session and central bank lifting 7s and 10s through the European open. China CPI for June was in line (+1.9% y/y) but a nice beat for PPI (+4.7% vs expected +4.5%) helped keep the upbeat tone. JGBs actually gave back .5 bps in 10y space, although they were flat in shorter maturities after a fairly well-received 5y auction. Elsewhere, RBA funding rates continue to push stubbornly higher after their post-quarter-end rebound last week, impacting rates enough so that Mizuho launched a AUD 5y issue to take advantage of the widening spread. As for equities, only the Hang Seng (-.02%) and the ASX 400 (-.4%) were lower in Asia, while rest of Asian bourses posted gains between .25% and .75%.

A small swoon in US equity futures on the European open helped rally US Treasuries all the way back through unchanged on the session, with light volume exaggerating the move slightly. Tensions in UK politics and Trump’s trip to Europe were behind some squaring early in London, but risk soon took hold again amid the light volume. SPGB 2y bid was unrelenting and a good sign of the risk sentiment; all of SPGB curve trades well (1 to 1.5 bps better across the curve and 3.5 bps tighter to bunds in 10y space) ahead of Fitch review of Spain. Even mixed data in the UK and soft ZEW in Germany did little to dent the risk sentiment, especially as it becomes increasingly likely that PM May will survive her current travails over Brexit defections in her cabinet. Good demand for a 35y EFSF deal has been baked into today, which is keeping another foot on fixed income prices, while German linkers found some limited support for a 12y issue but better interest in 28y term; an OBL (Dutch) 10y auction found decent demand as well. Flows included a good block seller of schatz at 5:48 AM ET, better real money selling of bunds (outright and on the curve against schatz before the block seller emerged) macro selling of gilts outright and against bunds, RV selling of red Dec short sterling (L Z9), supposedly against buying EDZ9 in the US, better hedge fund selling of US 2s, and RV selling of US 3s ahead of supply. Since NY has arrived, there has been better selling 1y to 3y sectors in concession for supply along with some levered piling on for the ride.

Today in the US, we will get the JOLTS survey at 10 AM ET, before we finally get some real data the rest of this week. Fed speakers are also taking today off before they all get back to working the circuit beginning tomorrow as well. However, we will start the supply train for July with $33BN in new 3y notes from Treasury at 1 PM ET, so at least we have something small to focus upon.

As feared yesterday, we couldn’t muster the energy to get as deep of a pullback as hoped, but that’s okay, there’s still another day to play here. With volumes rather light and attendance still spotty (plus World Cup, although not until late today), feel even more confident that we can continue to back-and-fill at levels that will be more rewarding to buy later in the month. So, for choice today in TYU, call the range 120-06+ to 119-29, with risk that we can take out the 119-29 level ahead of the 3y supply (which should be sloggy) and then make a break for the more interesting 119-22+ level. Below there, support would come in at 119-19+, then 119-13+. If something goes amiss and we take out 120-06+, then watch out for a quick pop up to 120-09, ahead of 120-14 and 120-20. Wish I had a good idea to capture this conditionally, but as much as I want to buy some gamma here, just think it can be had cheaper…

Have a great Tuesday and watch that front end,