quieter overnight ahead of tomorrow, but don’t get lulled to sleep….(Tuesday)

Markets are treading water ahead of possibly the last “big” day of the year tomorrow. Meanwhile, funding over the turn remains on everyone’s watch list, with today’s highlights being the stubborn, albeit steady, rate over the year-end turn (4.25%-3.87%, even with 1w trading down at 1.65%). There are a couple dealers speculating today that the Fed may need to start purchasing some coupons instead of bills to increase liquidity, which would be a rather large deal. Otherwise, it’s all about waiting on tomorrow’s data, the FOMC announcement, and Thursday’s ECB announcement. As of 8 AM ET, Treasuries are .75 to 1.5 bps lower in yield, with the curve small bull flattening, while US equity index futures are very slight lower ahead of the cash open.

Treasuries started firmer in Asia but trended lower throughout the session, touching unchanged just after Tokyo lunch at which point better buying interest materialized. Chinese CPI at 4.5% y/y vs an expected 4.3% and pressure on JGBs weighed on Treasuries for the first half of the European session; the JGB 5y auction was as weak as feared, but better interest to buy off the lows in JGBs helped Japanese rates to rally small on the session. JGBs ended up 1 bps better at -3.1% in 10s, while Aussie 10s rallied 4 bps and New Zealand rates rallied 2 bps. Asian real money was a seller of 5s from their arrival in the most notable flow of the session, while Asian banks were better axed to sell 7s and pay in USD 5y swaps. Japanese real money began a buy program against unchanged in US 10y after Tokyo lunch, concentrated in lifting 10s. Generally, Japanese and Asian real money accounts were better to sell spread product, but on limited appetite, and central banks seemingly took the night off. Treasuries tracked higher into the London open. Asian equities were mixed, slightly better in China on the inflation data, but very small softer in the rest of the region.

Treasuries saw more buying of 10s by Japanese real money right through the London open that helped mark bunds and gilts better, but there was a clear program to sell bunds from the outset: European real money sold bobls and bunds both outright and at the same time as they were adding US 5s and 7s, hedge funds were sellers of bunds outright and against bobls, and RV accounts sold schatz in set up for supply. A improving ZEW survey, even if not strong at -19.9 vs -22 expected, brought out more selling of bunds, but this time some of it was against buying US 10s as European real money lifted Treasuries for a second consecutive day. Japanese real money also bought a smattering of 5s and 7s as well mid-morning in London while consistently chipping away at additional 10y purchases. Japanese lifers continued their theme from yesterday: selling MBS to buy WN contracts on a duration adjustment sacrificing a little yield for the duration. The German schatz auction found better demand than it had at recent events, while Austrian 10y auction was not as bad as recently (notice how sluggish accounts are to add new paper in Europe?); bunds found support off the lows on comments from German engineering group that they don’t see any uptick in production soon. Germany trades sluggish across all asset classes, with DAX leading a small risk off theme, and bunds underperforming Ts by 2 bps. Gilts trade sluggishly as well, but on very light volume as markets attempt to understand latest polls that show major gains for Corbyn and Johnson seeming to lose his composure on a regular basis. European equities are down roughly 1%, led by a 1.3% decline thus far in the DAX.

Today’s calendar picks up marginally over yesterday’s empty cupboard, with productivity and ULC at 8:30 AM ET, but at least we will get $24BN in reopened 10s at 1 PM ET from Treasury.

Today should be a back and fill day; we have some work to do on the upside ahead of tomorrow from the technicals last week but then we should drop back down later in the day, all else being equal. For choice in TYH today, call the range at 129-12+ to 129-00 (range overnight has been 129-07 to 128-31). Support comes in at 129-00, 128-28, 128-26, 128-23+, 128-17, 128-14, 128-11; resistance comes in at 129-07, the aforementioned 129-12+, 129-17+/18, 129-21+, 129-26+, 130-00+. Well, so much for cheap Treasury vol; accounts spent yesterday buying Treasury tails on the exchange and selling rich fronts, reds, and greens in Eurodollar tails. Not enough to make them attractive yet, but getting closer. Oh well….

Have a great Tuesday,