rebalancing optically generates risk on trade, but overnight orderly (Friday)…


Wow, two days in a row of an orderly session may lull us into a false sense of security, but for now go with the flow and enjoy it. Market trades small to risk on today as there are some unwinds making their way through the market; there is talk that rebalancing has been at work since after Tokyo lunch in US equity index futures as well. Also helping risk was PBoC again setting yuan lower, today at 7.0879, and today’s guest speaker, China Deputy Finance Minister Geng, asserted that “effective communications” from the US (stop me while I chortle at that one) leaves him optimistic for a deal. As of 8:00 AM ET, Treasuries are 1-2 bps higher in yield with the belly leading the move while equity index futures trade .75% higher ahead of the cash open.

Treasuries came under early pressure in Asia, led lower by JGBs after the BoJ announced that they were cutting the size of their 5y to 10y purchases from JPY 450BN to JPY 400BN; also, Japanese jobless rate and IP were both slight beats. Japanese bank was a seller of US 10s, while Asian bank again paid in USD 5y swaps. Japanese real money accounts used the weakness in Treasuries to buy US 30s, while hedge fund was again seen doing 5s30s steepeners in USD swaps. Domestically, dealers were aggressive sellers of JGB 10s while fast money sold JGB 5s. For the session, JGB yields were 1 bps higher, while Aussie and Kiwi rates edged 1.2 bps higher in yield, with the former largely ignoring soft building approvals in July. Asian equities were higher across the board by .75% to 1.5%, with the exception of Shenzhen and Shanghai which were both marginally lower; NIKKEI closed up 1.2% on the bullish data.

Europe saw Treasuries step lower as US equity futures rallied steadily and inversely to Treasury prices from just before London open through mid-morning in London; as much as I hate to admit it, sure looked like rebalancing trade. Long end of Europe was under pressure and weighed on Treasuries after ECB’s Lautenschlaeger said she saw no need to restart QE (that’s hilarious). Limited activity saw better RV selling of 10s and buxl, macro selling of TY to buy (at the time) underperforming RX contracts, real money buying of long gilts and US 30s for month end, and some early rate-locking paying in USD 5y and 7y swaps just before NY arrived. Italy continues to trade in its own world, outperforming core by another 2 bps today; this will not end well in a few weeks. Same goes for Argentina, which is quiet today, but eventually people will figure out the powder keg down there has been lit (in case you missed it, S&P cut Argentina from B- to SD (selective default) yesterday and everyone pretending not to read the headline). European equities are trading small better on the session keeping with the small “risk on” idea.

Today’s calendar is at least the best of this week with PI/PC at 8:30 AM ET, followed by Chicago PMI at 9:45 and Michigan at 10 AM. There are again no Fed speakers or events on the schedule until next Tuesday, but keep an eye out for a drive-by. In the continuing move to a Communist society, there is no early close for futures or even cash this holiday, which is just so wrong. One more time for anyone asleep this week, here are final month end extensions: Treasuries at .12 years (avg of .11), credit at .09 years, MBS at .05 years, Pan-Euro aggregate at .02 years, Pan-Euro Treasury at .02 years, Sterling aggregate at .01 years, Sterling Treasury at .01 years, Japan aggregate at .03 years, Japan Treasury at .04 years (MS has a completely different view here and has an amazing .21 years, for what it’s worth). Not to be outdone, the imbalance team is calling for roughly $16BN in rotation from Fixed Income to Equities after this month’s sloppy equity underperformance, but as you know I think that’s a crock of doodoo anyway.

Okay, likely to be a choppy session but on light participation. With a corporate issuance calendar already over $40BN for next week (likely to grow) and looking like over $120BN for the month of September, it is a distinct possibility that we see some rate lock hedging come through between the 10 AM data and noon: watch 10s and 10y swap spreads for confirmation. Yesterday’s selloff saw aggressive long rolling in Treasury futures ahead of First Notice Day, which added pressure to the thin market (thanks Cliffy, good observation). You also had key reversal day lower formations in TUZ, FVZ and TYZ, but not in the more important US Classic or Ultra Bond. Still we were owed that new low at least in out to 7y which we got a couple of hours ago. It’s all about some cleaning up today and while choppy should be a fairly quiet day. For choice today in TYZ, call the range at 131-27+ (some weak data maybe early) to 131-02+ (that’s called hope). Support in TYZ ahead of 131-02+ comes in at 131-11+/10+, then 130-29+, 130-22, and 130-16 (no chance); resistance comes in at 131-20+, 131-27+, 131-31+, 132-01/02 level, and the high we are owed taking out at some point at 132-09. Gamma cheapened yesterday, get another day in the books and think about buying some conditional call structures in FV space (if you think spreads can be quiet or push out a little), or else 5y swaption tails, but may have to wait for Tuesday (and hope nothing goes boom over the weekend).

Have a good day and a safe holiday,