risk defensive, record low 5y GBP yields…let’s not get carried away!! (Thursday)

Markets continue their theme from yesterday, guarded risk off trade, only accentuated by lack of participation given the holiday in Hong Kong and China today. COVID-19 fears, month-end rebalancing concerns, quarter-end funding concerns, and whatever else you feel like throwing in are behind the small risk off move. Let’s not get carried away, as this looks more like a nice cleansing shower than a full on hurricane. As of 9 AM ET, Treasuries are 1-3 bps lower in yield amid a continued retracement of the recent steepening, while US equity index futures trade marginally lower but well off their overnight lows from early Europe ahead of the cash open.

Treasuries traded quietly in the Asian session given the holidays in part of the region. As expected given buying we have heard about since the afternoon of June 5 (i.e. Post NFP), Japanese flow of funds data released overnight showed Japanese accounts continued to add more USD product last week, making this their largest June buying in the last 5 years. There was some Japanese real money buying of US 30s after the JGB 20y supply, while Asian bank waited until Tokyo lunch to begin paying in USD 5y swaps today. Flows stayed remarkably quiet through the session until Asian central banks lifted new 5s, smattering of 10s, ultras, and a small amount of mortgages, apparently taking a pass on the rest of spread product.

In Europe flows picked up only marginally. There was better interest by real money accounts to pay in USD 10y swaps and receive in USD 30y swaps to add some duration, while some buying of WN ultras was also done by asset managers, adding pure duration supposedly for the rebalancing. German Federal Constitutional Court ruled against a second suit opposing ECB bond buying program on technical grounds, underpinning fixed income across the board. The bounce saw RV step in to sell WI 7s outright and on the curve against 5s and in the 5s7s10s fly as well, which is interesting. There was better sporadic, if not large, buying in 10s, US classics, 30s, and WN ultras from mid-morning London time right through the NY arrival; several sources cite month end rebalancing, but we’ll let you decide.

Asia was about getting past supply in a thin market, and after some hand wringing early and a very small concession, both the NZ 2037 tap and the JGB 20y went fine, with both markets rallying out of the supply on real money and domestic bank buying, the former for month end extensions and the latter covering hedges. Australian fixed income found support after RBA aggressively injected AUD 4.95BN in daily repos to maintain quarter-end liquidity and backstop yields. JGB 10s closed .5 bps lower, with 20y 2 bps lower; Aussie 10s closed down 4 bps with 3y down only 1.5 bps; and, New Zealand 10s were 1 bps lower in yield, with front end flat. The theme obviously was a small pullback in steepening theme. Asian equities were down between 1.25% (NIKKEI) and 2.2% (KOSPI).

Gilts saw 5y trade a new record low this morning, -0.057%, as there was macro buying of 5y gilts and good receiving in GBP 10y swaps. UK Gilt 9y linker went fine, and eventually helped support rest of gilt curve, as did macro receiving in GBP long end on talk of the rebalancing flow. Some buying of 20-40% delta calls in short sterling reds helped keep front end better bid. Bunds opened firmer and have not looked back, leading the move in European and US fixed income today. The German Court ruling looked to be mishandled by algos as BTPs got hit hard and bunds lifted; that was reversed slightly after a re-reading of the ruling. Better real money buying of buxl, better receiving in EUR 10y and 20y swaps, again talk being macro accounts doing rebalancing trade. Italian 2y and 6y linkers saw soft bid to cover but okay bidding that allowed the issuance to pass without incident and the rally to chug right ahead for bunds. EU rates came off their highs when ECB announced details of new repo facility for non-Euro CBs. European equities have turned mixed in the last 90 minutes, trading small either side of unchanged.

Today’s calendar includes the just released weekly claims, durables, final revision to Q1 GDP all at 8:30 AM ET (nonevent as expected), followed by Kansas City Manufacturing at 11 AM ET (ibid). Kaplan speaks at 9:30 AM ET (Bretton Woods webinar, could be interesting for you bitcoin miners) and Bostic talks on the economy at 11 AM ET. Of course, at 1 PM ET, we will get the final leg of this record month of supply–until next month’s new record– with $41BN in new 7s for us to chew over before month end. As a reminder, month end extensions see Treasuries extend .08 years, MBS extend .06 years, EGBs extend .09 years, Sterling extend .16 years, and JGBs extend .2 years. And don’t forget the rebalancing…

Late yesterday we saw covering in the large position for tomorrow’s (July expiration) 139+ call, dropping from 106K positions as of Tuesday’s close to 71K today; 139 strike (ATM) jumped to 103K from 55K yesterday. If you don’t make a move through 139-08 today, they may get a chance to clean up more of the calls and lessen the risk at 139-16. Be very careful is all we can say….

There are a few things brewing that make this look like a perfect storm. In a way, it’s a perfect rain, not so sure you’re really going anywhere legitimate and this is more technical adjustment than any type of new paradigm. Now let’s see how much we regret writing that. For choice today in TYU, call the range at 139-06 to 138-26, after an overnight range of 139-02 to 138-27+. Think you have to make them sweat with a trade up, but not through the 139-08 level is the guess, then rotates down to give accounts the idea that their short calls are safe for expiration. IF that’s correct, we all know what happens overnight. That’s an awful long and winding road map, but you gotta have some plan. Support in TYU comes in at 138-29, the 138-26 objective, 138-19+, 138-16, 138-10, 138-08, 138-01+, 137-24, 137-21; resistance comes in at 139-03, 139-06/07 level, 139-09, 139-16, 139-25, 140-02.

Have a great Thursday,