Refunding announcement a sobering reminder, after quieter night (Wednesday)

Since it’s Golden Week, waited until after the only relevant data of the day to write. With Japan out (one more day!), cash did not open until London came in. ADP was the optically shocking number we expected, and Treasury refunding details for this quarter and next week specifically were as awful as the bond vigilantes had expected, even worse in some cases. Treasuries are getting flogged, the long end excessively, as yields are .5 to 6 bps higher in a consistent steepening along the curve. US equity index futures are small to better but well off their overnight highs ahead of the cash open.

Treasury theme again overnight was largely sideways trade through Asian hours, small offer to Treasuries as the standard recent “recovery” bid crept through Asian bourses and US equity index futures leading up to London open. There was some small hedge fund selling in TY contracts when eminis rallied back above unchanged a couple hours before the London open. Treasuries got hit when London and Treasury cash market opened, being led lower by bund and gilt selling ahead of supply in both those countries. Two USD corporate deals hit the tape mid-morning in Europe that resulted in paying of USD 10y swaps and selling of US 7s outright. There was continued real money selling of 10s and paying in USD 7y swaps to buy bills. Treasuries remained under pressure even as supply in Europe passed and core bonds recovered there, with hedge funds and RV accounts selling 30s outright and on curve ahead of the refunding announcement.

ADP was a nonevent for the market, a scary event optically, printing -20.2MM (yes million) for the month of April, even if it bettered estimates by 800K. The refunding announcement was the deal though. 3y size of $42BN was in line with expectations, but $32BN in 10y notes and $22BN in 30y pretty much spoiled the party. The headline “US expects to shift financing from bills to longer tenors” is what has driven 30y and 10y yields 4 and 3 bps higher respectively since 8:30 announcement. And that is it for today’s events, while we have Barkin speaking at 9 AM ET and Bostic talking at 1:30 PM ET.

The Asian session saw Aussie yields jump 3.5 bps in 10y space while Kiwi yields were a nice 9 bps higher. In both cases, poor view of the QE buybacks resulted in pressure after a sloppy US day started the selling; even a well-received 2031 TAP in Australia did little to assuage the selling or steepening. As for equities, Asian bourses were slightly better after the performance of US equities on Tuesday.

Europe saw early dealer selling to build in concessions for the UK 3y and 2054 supply, while Germany’s was the bobl and the 15y syndication. The UK 3y had a smaller tail but lower lower demand, while the 2054 auction saw good bid but a strong tail. The 5y Bobl auction was unambiguously strong and resulted in a stealth bid for the belly that has helped 5y sector outperform since the supply. Data in Germany was weakish (factory orders fell more than expected, EZ service PMI was basically unchanged), while news in UK centered on death toll from COVID-19 remaining stubbornly high. GBP sold off in fairly aggressive fashion early in session before basing mid-morning. Peripherals are in line to slightly tighter to core at the moment, while European equities are mixed at the moment.

So all the bad news is out, for now. Guess the accounts that have been selling the belly to pile into bills got it right. And stocks, looking primed for a test of 2900 here, that could be so critical. Treasuries will struggle today; we are at key levels in TY, cash 10s and US Classic futures. You also have a quickly growing calendar for today: after $18BN in HG issuance yesterday brought the 2-day total for this week to $47BN, looks like we may clear the estimate for this week of $67-70BN pretty easily, maybe even by the end of this day. Calendar rolls will also start to trade now that we have sizes for our supply this quarter; early read was this will be a duration positive for Treasuries as there are more real money shorts who will be buying extra June contracts, but that is more noise than real. Treasury basically told you that they are working in lockstep with the Fed: front end will be pegged and back end will be left to trade. Should get interesting in the upcoming few months.

For choice today in TYM, let’s call the range at 138-23+ to 138-11+, understanding that we JUST traded 138-12, and with an overnight range of 138-26 to 138-12. Support below the market comes in at 138-02, and then key 137-28, followed by 137-22, 137-16, 137-06. Resistance comes in at 138-20, the objective at 138-23+, 138-29, 139-02, 139-05, 139-11+/12. Okay, enough for now.

Have a good hump day,