reversed some of last two days, at least until US showed up… (Tuesday)

In opposition to yesterday, most asset classes enjoyed a day in the sun for much of the evening. At this time yesterday, most assets were negative; today most are marginally positive. Activity continues to be average at best, with Treasury volume right about at its 10DMA. As of 8 AM ET, Treasuries are almost back to flat on the curve, small bit flatter, having surrendered overnight gains and flattening, while US equity futures trade about .5% better in most indices.

The Asian session saw an early US levered buyer of cash 10s, but better interest by Japanese real money to sell 3s and 5s resulted in Treasuries surrendering their small early gains. However, once Asia got in, the buying began in earnest for Asian real money accounts, pretty much across the curve, with 30y finding best interest after a good backup outright and on the curve since Friday. There was a hedge fund paying in USD 5s30s on the swap curve after Tokyo lunch that kept Treasuries in check. After a soft Japan Manufacturing PMI (51.6 from 53 last), Japan was all about the 40y auction by the MoF. There was demand for the long end issuance, matching Treasury interest, into the bidding, which saw decent demand (3.3 bid/cover) and pricing (1.5 bps through) as 40s rallied 1.5 bps; however, after the auction better selling outright and on the curve against JGB 5s resulted in 40s closing 2 bps higher on the session while front end was 1 bp better. There was domestic receiving in JPY 5y swaps to sell 40s outright and to pay in JGB 40y swaps that set the tone for the steepening. Chinese announcement of a series of tax cuts to stimulate demand saw yuan fall to its lowest level in over a year, underpinning Asian stocks and US index futures. Rest of Asia was relatively quiet, preferring to watch Japan for further signals. Asian bourses were uniformly higher after the performance of US equities yesterday, with NIKKEI up .5%, China up between 1.4% and 1.6%, and the rest of the Asian bourses up roughly 1%.

The European open saw yet another round of Asian real money buying in US 10s and 30s but the buying met with much better selling by CTA accounts in USU and TYU contracts, along with hedge fund paying in USD 10y swaps. Dealer and RV selling in gilts ahead of supply pressured GBP rates and weighed on bunds as well. Some deal-related paying in EUR 5y swaps and selling of US 10s against bunds kept gains in check through mid-morning, with stronger French and German manufacturing PMI providing the impetus for a trade to the lows of the session. Off those lows, better short covering materialized led by macro fund buying 10s, deal-related lifting in bobls (ESM EUR 5y deal looks severely oversubscribed), and multiple accounts buying bunds as BTPs struggle this morning (5.5 bps wider to bunds in 10y space). RV account was a good seller of US 30s later in the morning in Europe, buying US 5s and buxl against the sales. BTPs have seen domestic selling in 10y sector, along with dealer selling in 5s. The 7y gilt auction also supported the market, with good bid to cover on decent demand and smaller-than-normal tail to the supply. Auto stocks are leading equities higher in Europe, and helping to support US index futures as well. Since NY has walked in, we have seen the long end give back to the last of its bid, with small clips of selling in the long end since the US open and bank portfolio paying in USD 10y swaps.

Today’s calendar includes HPI data at 9 AM ET, Markit PMIs (both service and manufacturing) at 9:45 AM, and Richmond Fed at 10 AM. So the second-tier data will take a serious backseat to the start of this week’s US supply, beginning with today’s $35BN in new 2y notes to be auctioned at 1 PM ET. There are no Fed speakers or appearances for the next 8 days as Fed is in blackout period ahead of next week’s meeting.

Well, a week ago, couldn’t for the life of us figure out HOW we were going to get a pullback to 3% in 10s before the beginning of August. And 3.1/3.15% in 30s???? Hah, looks like we are going to get it, thanks to our friends in Japan and a few accounts seriously offside on the conditional curve positions. This has been a beautiful thing, and it is not done yet, although playing to monetize this activity is dangerous. If anything, use these moves to get the right positions for the bigger themes, such as last Friday’s suggestion to start buying some vol (10% or so was the recommendation). This is another one of those chances to add more vol, with the early flattening/quiet market helping to pressure vol early today. Want to play the move and add some gamma? Buy a covered put on 30s and buy some 5y straddles. Buy the puts on the exchange (USU, 31 days, buy 20% delta in USU 140 put for 16/64) and buy the 5y straddle in swaptions as this curve move is not done either but 5s should perform. As for today in TYU, for choice call the range at 119-22 to 119-07, the former being the daily pivot and the latter being 3% equivalent in cash 10s assuming no change in basis on the break. If we get through the daily pivot, we’ll run into resistance quickly as we fill single prints up to 119-24, and more single prints up to bottom of value from Thursday at 119-27+. You should not get above there today but just in case, watch 120-02, 120-10+/11, 120-15+, 120-22, 121-02. Support comes in at 119-13, the aforementioned 119-07, 119-01, 118-29, and 118-25.

Have a great Tuesday,