quiet Monday as every dealer wants to be short the curve….oh oh?? (Monday)

We kick off this week in the throes of summer lethargy, the highlights of the weekend heading into Monday being Trump’s executive order on COVID-19 aid, Chinese sanctions on US officials (largely symbolic), and a holiday in Japan that made volume and flow even quieter. As of 8:15 AM ET, Treasuries are .5-1.5 bps lower in yield, led by the belly, while US equity index futures trade small better ahead of the cash open.

Treasury flows overnight were muted at best. There was some minor paying in USD 10y and 30y swaps during the Tokyo afternoon, after better selling of TY contracts and cash 10s by levered accounts (CTAs, hedge funds) during the early Tokyo session. Asian bank was better seller of 5s and paid in USD 7y swaps as well. With risk opening firmer in London, Treasuries saw macro selling of 30s outright and against buxl (one of the dealer weekend trade ideas, don’t like it, but….). Risk couldn’t hold a bid, and better real money buying of bunds and 10s, along with RX and TY contracts helped the belly lead a move back through unchanged. Some central bank buying of 10s and mortgages further underpinned the rates market as fixed income drifted higher on very light volumes globally. With the arrival of New York, there was some deal-related selling in 10s and outright selling in US 20s (another dealer theme from the weekend musings).

Asia was quiet with Japan on holiday. Aussie 10s came under early pressure as hedge funds sold 10y futures outright and against Aussie 3s, helping to steepen the curve there smartly. Aussie 10s were 3.5 bps higher in yield, with Kiwi yields closing 1 bps higher in sympathy. Asian equity futures traded small to better on the session but nothing major.

Europe opened better to risk, but the announcement by China of sanctions on 11 US officials, largely symbolic (Senators Rubio and Cruz among those sanctioned), still was enough to highlight the persistent tension between the US and China. Bunds and gilts have more than reversed opening weakness to lead rest of fixed income lower in yield, with Europe outperforming US ahead of quarterly refunding that kicks off tomorrow in the US. There has been better buying of France, outright and against Germany and Spain that is being talked about, but flows dried up appreciably once market reversed early weakness. GGBs under pressure on renewed tensions with Turkey, while PEPP/PSPP buying has underpinned European rates generally. BOE buyback in 3y to 7y sector supporting gilts.

Today’s US calendar brings us JOLTS data at 10 AM ET, while Evans speaks at 4 PM ET on a Workforce Webinar. There will be normal 3m and 6m bill auctions at 11:30 AM ET today, before we kick off (another!) week of record refunding sizes for Q3, 3y tomorrow with 10y and 30y to follow. The calendar will pick up as well, but it’s the distribution of the supply that will take center stage.

Speaking of the Treasury curve, there are numerous, as in more than I care to count, pieces out this weekend about either shorting 10s-30s outright or putting on steepeners for the supply, even though that idea would probably best have theoretically been done last week. Not to throw cold water on anyone’s idea, and a steepener very likely will not hurt you between now and Thursday and might even make some small change, but take a look at Commitment of Trader report that came out Friday. If you didn’t see it, positions as of close on Tuesday showed WN ultras saw shorts increase slightly, leaving the net short position at short 335K (65K long, 400K short). Meanwhile US classic bonds saw a net 27K shorts added to net position leaving that position at a record 150K short (114K long, 264K short). And you did not have changes in open interest on the CME daily reports that would even begin to indicate those positions were reduced (in fact, you could easily make the case that the shorts grew again!). You may steepen for the supply but you better be nimble because there is a good, old-fashioned squeeze afoot here.

Look at the market today. When nobody was looking, we took out the lows from Friday in WN, US, UXY (ultra 10s), and TY on the European open. And then we went straight up, but interestingly led by the belly; either way, close up on the day and you will have reversal sessions higher from TY out the curve. For choice today in TYU, calling the range at a very weird 140-07+ to 139-29, after an overnight range of 140-02+ to 139-27. Seems to me there should be a better effort to add some concession in a quiet market ahead of the supply but all the numbers say something different. Support comes in at the aforementioned 139-27/28, 139-24+, 139-19+, 139-11+; resistance comes in at 140-04, the aforementioned 140-07+, 140-10+, 140-17+/18, 140-21, 140-24+, 140-30, 141-04.

Have a great Monday and be careful out on the street,