relatively orderly night, but plenty out there to watch and know…. (Tuesday)

Nerves remain frayed, with a lot to watch for these days, but this was a tamer session than late, as global equity, rates, and commodity markets have spent the night trading both sides of flat, largely flat ahead of the US day. There is much to watch between China, Hong Kong, Italy, Argentina, and the Fed conducting its first POMO of the brave new easing cycle (or should we say “adjustment”). It’s like the good old days of “Whack A Mole” all over again, just 11 years later than the last time we played. As of 8:15 AM ET, Treasuries were flat to .5 bps higher in yield while equity index futures are marginally softer ahead of the cash open.

Treasuries resumed trading last night in Asia in line with the levels traded at 5 PM ET, slightly higher in yield than at 3 PM ET, and largely drifted sideways throughout the Asian session. Even though Japan is officially back from yesterday’s holiday, the “Obon Festival” continues all week, leaving many companies closed and trading desks thinly staffed. There was some levered short covering in USTs from 2s out to 10s, with some Asian asset manager paying in 5y5y forward USD swaps in smaller size, all of which helped offset Japanese insurer buying of US 30s. Asian bank bought US 5s, while Asian real money shortened durations by doing US 3s10s and 5s30s steepeners. Locally, JGBs played catch up to the bull flattening in Treasuries after being out yesterday, with JGB 10y rallying 1 bps and 30s outperforming an additional 2 bps. Aussie 10s rallied an additional bp on some domestic buying of Aussie 10s to sell US 10s. China again set the yuan lower, fixing CNY at 7.0326 vs 7.0211 yesterday; the market largely shrugged it off for now. As for equities after a poor showing in the US yesterday, NIKKEI was down 1.1%, mainland China shares were off just under 1%, Hang Seng was down a bothersome 2.1%, while rest of Asian was down between .5 and 1.5%.

Flows picked up through the European open, with 2-way flow seen early in the session: LDI-related receiving in USD 30y and some macro account buying of US 10s and 30s outright, while RV accounts used the better levels to sell 30s against receiving in USD 5y swaps and buying of 30y German buxl. Long end of US curve was also pressure slightly in sympathy with concession-building for 30y gilt supply, while better than expected UK employment data weighed on European and US rates, until soft German ZEW (-13.5 vs -6.3 expected, another dog) caused market to rally back to the middle of the overnight range. Decent UK 30y gilt auction helped underpin market as well, especially in the long end for UK and EU rates, with flatteners resuming with gusto. There has been very good LDI-related receiving in GBP and EUR 20- and 30y swaps, along with outright buying in the same durations by those accounts and dealers looking to get hedged. Buxl has been the star performer since UK 30y supply. Treasuries saw some small receiving interest on the back of the move in Europe, but hedge funds have been better payers in long end, outright and on spread against USD 5y swaps.

Today’s calendar includes CPI and real earnings at the bottom of the hour (8:30 AM ET), along with the NY Feds quarterly household debt and credit report release at 11 AM. As of now, there are no scheduled appearances on the calendar. Today is the big day for Fed’s first announcement during the latest QE cycle, with a scheduled release around 3 PM ET, looking for them to announce intended composition sizes, like on the order of $28-$30BN monthly, 2/3s in MBS being the consensus. And here we go again….

Okay, back to the free market where prices are determined when the Fed is not playing role of “the invisible hand.” Let’s keep this short: numbers in a couple minutes. For choice today in TYU, let’s call the range at 130-22 to 130-04+. I know it’s Tuesday and time for a bounce in stocks, but something just isn’t lining up today. Support below here in TYU comes in at 130-07, the 130-04+/130-03+ level above, 129-27, 129-25, 129-15, 129-09+; resistance comes in at 130-10+, 130-17 (overnight high), 130-22/23 objective, 130-27+, 130-31+. It still appears that dealers are chasing some long end gamma here, with the collapse in the CME/LCH basis likely a good barometer of what is happening: dealers positions are against CME, LDI is active in LCH, and the you have a number of structures that come off in the next four sessions, so stay away from the long end or vol unless you have to is my thinking. Don’t play with fire. I guess that goes for vol in general for the moment; we are in a coiling period this week (or at least I hope); there will be better opportunities to express a view conditionally soon enough.

Have a good Tuesday,