The end of this week has suddenly gotten more interesting than most people may have envisioned just a couple days ago. Risk-off move driven by soft European data (okay, awful data), bunds tagging 0% yield for the first time in 30 months, and quarterly options expiration in UST futures threaten to make this a tough day to ignore the market and watch college basketball. As of 8:30 AM ET, Treasuries we 4-5 bps lower in yield from 3 PM yesterday, led by the belly while US equity futures are bouncing slightly off their lows, down .5 to 1%.
The Asian session was quiet enough, even after Japan came back from a one-day holiday. Flows were better skewed to buying as one might expect with Japanese real money accounts nibbling in 10y sector, while Asian banks were better buyers of US 5s. There was a credit account that received fairly aggressively in USD 10y swaps early in Asia, but after Tokyo lunch there was better paying by Japanese bank names. There was buying of 30s by hedge fund after Tokyo lunch as well, but in the main Treasury prices went bid into Tokyo lunch on the early buying and then traded sideways 1-1.5 bps lower in yield through the early part of the London morning. The story in Asia was the “catch up” bid in Japan as JGBs traded for the first time since before Wednesday’s FOMC, with market paying little attention to mixed data in Japan and Australia. Japanese long end ripped higher, with illiquid long end in Australia following suit. JGBs rallied between 1.5 and 5 bps across the curve in a dramatic flattening move. Quick note here: makes sense that Japanese accounts did not have time to think about fiscal year end, which is now 9 days away, but it will be interesting to see how this plays out next week between year-end accounting machinations (repatriation) and month end extensions in a risk-averse market.
Europe kicked off quietly, still digesting the EU decision to grant a Brexit extension and preparing for the MV3 vote. The calm shifted dramatically when PMI data hit mid-morning: French manufacturing fell to 49.8 from 51.5, Eurozone manufacturing fell to 47.6 from 49.3, but the big one was German manufacturing falling further to 44.7 from 47.6. It was a buying frenzy after that, as shorts were squeezed in bobls, with real money eventually stepping in to aggressively buy the long end. Bunds traded below 0% yield for the first time since 4Q2016. From 4:30 ET on, it has been a proverbial reach for all fixed income securities. Highlights included RV covering in buxl aggressively, real money lifting bunds and buxl, European banks doing EUR 2s10s flatteners in swap space and CTA buying in RXM and OEM. Front end of sterling curve is well bid on back of RV and hedge funds both buying, causing levered accounts who are short that skew there to get squeezed. Treasuries were dragged along for the ride, with real money buying 5s and 7s, option-related buying of FV and TY contracts, and fast money looking to short 10s. We have had another uptick since NY walked in, with Treasuries now leading a second risk off move, short covering across various account types being the main theme.
Today’s calendar includes US Market PMI at 9:45 AM ET, followed by inventories/sales and existing home sales at 10 AM. Don’t kid yourself: given the state of the market, we are in the perfect storm of risk aversion and quarterly options expiration in the midst of quarter end (Japanese fiscal year end) while dealing with illiquid markets (spring break and college basketball tournament). Here is some expiration information as well for today’s Treasury futures:
TY FV
CALLS STRIKE PUTS CALLS STRIKE PUTS
53,000 123.50 11,000 47,000 115.25 6,000
28,000 123.75 1,000 28,000 115.50 3,000
61,000 124.00 253 15,000 115.75 84
12,000 124.25 14 13,000 116.00 28
Okay, think you should get the point from the above. For choice today in TYM, call the range at 124-02 to 123-23, with the risk being a trade through 124-02 that will take us almost immediately to 124-08. When things quiet down later today or Monday, there will be a chance to buy some gamma. Just do it. Think the move in 5y is close to being done (he’s says while praying), so would look to add that gamma in 7y or 10y tails, ideally 10y. There are too many ticking packages out there to be short or without gamma protection for the next three weeks at least. But we’ll be back on that later.
That seems like a lot to digest right now, so good luck out there and hopefully you will have a restful weekend because it looks like the next week may be a long one….
mjc