quiet start but poor bobl auction muddies US 5y supply later…. (Wednesday)

It has been a tamer trade on lighter volumes thus far this Wednesday, continuing the minor flattening theme from yesterday after the blow-out steepening the previous few sessions. A very weak German bobl (5y) auction highlights the risk for today’s US 5y supply, but for now it’s wait time. As of 8:15 AM ET, Treasuries are flat to 1 bps better in a flattener while equity index futures continue to chop around down marginally ahead of the cash open.

The Asian session opened mixed, but soon turned to better buying in Asian and US fixed income. Soft Q2 PPI data out of Australia, a lack of sellers for the BoJ operation, and some short covering all conspired to keep fixed income bid through the Asian session. Hedge fund received in cross-currency rate space, Asian banks covered shorts by receiving in USD 10y and 30y swaps, credit desks and central banks bought additional 30s. On the other side of the ledger, Asian real money used bull flattening after Tokyo lunch to unload US 30s in cash and Japanese banks sold US 5s and 7s. Locally, the BoJ buyback found limited interest to sell, even at prices through market offer, with the 20y sector noticeably absent sellers. By session’s end, JGB 20y was 3.5 bps lower in yield, dragging the rest of JGB curve along. AUD came under early pressure and stayed that way through the night. Chinese stocks closed largely unchanged while NIKKEI was .5% higher and rest of Asian bourses traded quietly as well.

Shortly after a positive European open for fixed income, Treasuries were dragged lower by initial selling of bobls ahead of supply in that sector; there was also CTA selling of 10s well after Europe opened. RV accounts were better sellers of 5s outright and on the curve throughout the European session, even as 5s traded much tighter in repo. Apparently they knew something about the morning, as the bobl auction was nothing short of ugly, technically uncovered for a EUR 4BN issue that tailed some 3 bps. German IFO data saw an uptick in current conditions, but a dip in future expectations made the release largely a dud, although there was hedge fund and macro account selling in bunds and gilts after the release, with Treasuries seeing small knock-on sales by levered accounts. Generally, European real money was a better buyer of bunds and buxl, outright and on the curve against bobls, while curve flattened on the issues with the bobl auction. Central bank lifted ultra gilts (which again trade very well outright and cross currency) and US 30s, with UK real money also lifting ultra gilts, but better NY interest to pay in long end took back some of the overnight flattening in Treasuries before a $370K block lift in TY steadied Treasuries ahead of the Chicago open.

Today’s calendar consists of New Home Sales at 10 AM ET, followed by Treasury’s “daily double” issuance of $18BN in 2y FRN in a reopening at 11:30 AM and then $36BN in new 5y notes at 1 PM ET. There will be no Fed appearances or speakers as we are smack in the middle of the blackout period. However, markets will watch the EU/US meetings on tariffs and trade closely, especially the Junker/Trump meeting at 1:30 PM ET.

Well, for openers, the market will be carefully watching the 5y set up, especially given what a dog the German bobl turned out to be. Interesting that 5s trade so tight in repo, indicative of a decent short, but at the same time RV wasted little time in adding to shorts during the European session outright and on the curve. Want to say that repo is right, but it’s just too early and liquidity is not deep at the moment. Bigger picture, this is all a nice rest, but still think we are going to get that 3% trade in 10s, and with a little luck we can get 3.2% in 30s. If we stay quiet and flatter, there will be some offers to 30y and 5y tails, and it isn’t wrong to keep adding small clips here. For choice today in TYU, call the range at 119-29 to 119-15. Think you should hold bottom of value from yesterday while you should also get some covering ahead of the ECB tomorrow morning. Resistance in TYU comes in at 119-21+, 119-24, the aforementioned 119-29, 120-02, 120-10+, 120-15+, 120-22; support below 119-15 comes in at 119-13+/13, 119-07, 119-01, 118-29.

Have a great hump day,