This has been the quietest session in over a week, albeit with the normal amount of news and a choppy trade, but seems like all global markets are tired, weary, and looking for a breather. After an initial steepening, Treasuries are back to flattening, this time in bear formation for now, while risk trades slightly better around the globe. As of the Chicago pit open at 8:20 AM ET, Treasuries are flat to 2 bps higher, with 30s the flat and 2s the 2 bps higher (you get the point?), while US equity index futures are up just over 1% ahead of the cash open.

The initial move in Asia was a bear steepening, as Treasury Secretary Mnuchin again touched on how serious the administration is considering the issuance of long-dated debt (50- and 100y bonds for those living under a rock). Kaplan (open to further cuts) and Daly (consider impact of running economy too hot and watching corporate debt) comments were largely ignored just before the Asian open. The Mnuchin comments saw RV and hedge fund selling of US 30s, both outright and on the curve against 5s; that was followed by the same accounts doing more of their trade from yesterday’s Asian session, by adding more USD swap steepeners in 2s30s and 5s30s. The long end didn’t stay down for long though, as USTR Navarro was on the tape saying not to expect a quick breakthrough in US/Chinese negotiations. Risk took some cover, and Treasuries bounced, of course with the long end leading. Asian real money accounts were much better to buy in 10s, with Japanese lifers buying US 30s to sell some JGB 30s ahead of supply in that sector in Japan next week. Asian banks used the bounce to sell 7s outright, being raced by RV accounts setting up for today’s US supply in that sector. Treasuries drifted higher in the Tokyo afternoon on some small month end buying as volume and activity dried up. Locally, JGBs rallied .5 bps, New Zealand rates rallied 2 bps, and Aussie rates rallied 1.5 bps in 10s but 2 bps in 3s as business investment data disappointed and leaves the RBA open to further cuts. PBoC set the yuan at 7.0858 versus expectations of 7.1705, as market barely reacted for a third day in a row. Asian equities were mixed, little changed on the session in an very quiet trade.

The European open saw continuation of the real money buying in US 30s as the curve flattened further, with gilts called to open better but bunds under minor pressure after comments from ECB’s Nowotny that at some point ECB will have to disappoint markets, a clear shot at all the QE schemes that have priced into markets. Bunds saw better outright selling by macro accounts, with some small European real money buying of buxl, but better real money receiving in EUR 10y swaps. Gilts never did get that better open as Treasuries broke lower and led Europe on comments from Chinese Commerce Ministry spokesman Gao that China will not react in kind to latest US tariff threat and that there continue to be discussions on a US-China meeting in the US in September. Market took that as sign that said meeting is more than in planning stages. Treasuries broke 2.5 bps, of course maintaining the flattening bias, taking bunds and gilts along. After a small bounce, bunds led everyone down on stronger EZ confidence number (think Nowotny, EVERY number can’t be worse): 103.1 vs a last of 102.7. Flows included better macro paying in USD 10y swaps, RV buying of bunds against US 10s, a buyer of RXZ to sell TYZ, a seller of TYV 132/132.5 call spreads at 14/64, syndicate selling of bunds and bobls ahead of Italian BTP supply, hedge fund selling of gilts outright and against receiving in GBP 10y swaps. Volume was mediocre at best, and poor in Treasuries, in a general risk on trade. BTP auctions saw some overbidding but cover was soft in a mixed affair for 5s, 10s, and 5y CCTeu paper. Crude, equities, dollar all trade better in general risk on theme, but it is early….

Today brings us weekly claims data, second look at Q2 GDP, and inventories data all at 8:30 AM ET, followed by pending home sales at 10 AM. Nothing too Earth-shattering. There are currently no Fed speakers or appearances on the calendar until next Wednesday. At 1 PM, Treasury will conduct its last auction of this month, selling $32BN in new 7y paper.

So all I read this morning is about the lack of appetite for long end given the move in fixed income this month against the move in stocks. To quote a wise sage, “Oh poppycock!” We had every reason to punish the long end of the Treasury curve overnight, and then we had a risk on trade to seal its fate. What is the curve doing in the US? Flattening almost 2 bps in 2s30s and 1.5 bps in 5s30s (new 5y makes it look optically flatter). So all that rant aside, the market is far from done with the pain trade here, and it is the bad steepener position for the foreseeable future. For choice today in TYU, call the range at 131-15 to 130-31, thinking that the last of the calendar rolls will get cleaned up today and market will remain quiet. If that thinking is wrong, then the upside level will be up at 131-25 (gulp!), but there are several indicators calling for a quiet grind today. Support in TYU comes in at 131-03+, the aforementioned 130-31, 130-27+ 130-25, 130-17+, 130-14+ and my favorite 130-09+ level we will never see again! Resistance comes in at 131-11+, the aforementioned 130-15+, the minimum objective level of 131-19+, 131-25, 131-31, 132-03+. IF we stay quiet, somebody may start aggressively hitting some gamma and there may be a chance to add some conditionals early Tuesday (a fella can hope, right???).

Have a great Thursday,
mjc