It has been a fairly quiet start to November, with the BoE voting 9-0 to leave rates unchanged as expected, after an interesting wrap to October that still left us truly uninspired. There is a small risk on tone to markets on back of news reports of Brexit deal (yawn), more Chinese stimulus (yawn again) and better peripheral performance in Europe (rinse and repeat). As of 8 AM ET, Treasuries are again bear steepening, but with only modest losses currently, while equity futures are marginally better to kick off the eleventh month of 2018. It should be an interesting next week with the employment report tomorrow and midterm elections on Tuesday ahead of the FOMC on Wednesday.
The Asian session saw Japan and Australia reprice lower to start the month, more so in Japan as JBZ8 futures were down a quick 15 sen (big move these days when rates are that rigged). Disappointment over the November buyback plan along with some concession building ahead of a JGB 10y TAP added to the pressure, but passable auction allowed JGBs to bounce late in the session. Talk of more Chinese monetary stimulus helped bolster Chinese bourses, while NIKKEI weighed on rest of Asia as that index was down 1%. Treasuries opened the session to better buying, as has been the theme in recent months when we have seen Japanese and Asian real money accounts add their month end duration early in the new month. However, those gains were short lived as the Chinese stimulus and an FT article on a Brexit deal took Treasuries lower ahead of Tokyo lunch break. Japanese pension and lifers sold 30s outright and paid in USD 30y swaps, while Asian banks paid in USD 5y and 10y swaps. Off the lows, Asian real money again lifted 7s and 10s for more month end, while central bank was buyer of 2s and 3s and received in USD 5y swaps.
Treasuries traded sideways through the European open, watching gilts match earlier pressure on the FT article over Brexit, with gilts dragging bunds slightly lower. After a weak UK PMI report, pressure on gilts lessened as shorts covered ahead of today’s BoE meeting. More entertainment from Italy in the form of “pension reform” and “citizenship income proposals” have helped underpin BTPs (good luck getting that done!), along with the rest of sovereign debt; given there are 30 more days in this month, banks and money managers have been willing to add some BTPs today, both outright and on block against bunds. European money manager bought US 30s, but dealers in Europe were better sellers of 10s and 30s on the bear steepening of the bund curve in an otherwise very quiet session. BoE was a nonevent as expected at 8 AM ET (earlier Daylight savings time change in UK).
Today’s calendar is loaded: productivity, claims, ULC, PMI, ISM, vehicle sales, but the big event remains tomorrow’s NFP report followed by the midterm elections on Tuesday and the FOMC meeting on Wednesday (although the latter should theoretically be a nonevent). Don’t think we will get much mileage from today’s events or data.
In case you missed it yesterday, guess the “asset allocation trade” highlighted by top strategists really occurred yesterday. $14MM DV01 in long end (WNZ8) were sold between 2:58 and 3:02 PM ET, at the exact same time equities put in their highs for the day, clearly an asset allocation. That’s almost 57K contracts in a product that trades in 100-lots. The curve steepened sharply on the trade, and of course we haven’t moved since then. Oh well, promises, promises. As for range today in TYZ, for choice let’s call it 118-19 to 118-05+. Some potential weakness in data should be offset by accounts getting short ahead of the NFP report. FOA trades just over 5 bps, well below last month’s 6+ bps but above the recent average down in the 4s. Resistance in TYZ comes in at 118-23, 118-28, 119-01 and 119-03+; support comes in at 118-10+/10, 118-05+/05, 117-31+, 117-27+, 117-20/19.
Have a good Thursday and hopefully we’ll be very busy over the next week….