risk hangs tough under legitimate threats, otherwise so boring…. (Thursday)

As expected, China passed a new law overnight increasing control over Hong Kong, now waiting on US response. Trump did issue an executive order overnight that increases legal/financial exposure for social media (read: Twitter especially). NASDAQ is under a little pressure on the order, but risk markets remain amazingly resilient at the moment. We trade small to risk on globally in a very quiet session thus far ahead of decent data calendar and 7y auction in the US today. After the 8:30 data, Treasuries are mixed with a slight steepening bent, while US equity index futures show mild pressure on the tech sector but continued resilience for the broader market ahead of the cash open.

Treasuries have seen small thematic flows overnight, but no volume beyond that on the margins. Here’s a weird one: heard from several folks that Asian central banks were sellers of 7y, along with selling small amounts of 30s and mortgages. The former makes sense ahead of the supply today but the latter runs completely counter to their program for the last few months; have to assume it must be adjustments for month end, taking some profits maybe. Will require watching tonight though, and do have to remember that the sizes were small. Asian insurer took advantage of pressure on long end to lift WN contracts and receive in USD 30y swaps. Asian banks were better buyers of 2s and 3s, helping those sectors outperform for much of the late Asian and early European session.

In Europe, US rates trading really got quiet, with some real money buying of 30s for month end, but better RV selling of US contracts to buy FV and cash 5s. Treasuries ground higher after European open, following the lead of bunds which caught a PEPP-inspired bid for the first time this week. A good UK gilt 30y auction brought out more month end buying in Treasuries, this time hedge fund buying US 10s outright and on the curve against 30s. Futures volume has been very light, with swaps not much better. There was some deal-related receiving again just before NY arrived, while RV account has been adding to USD 10y/20y/30y fly position (receiving in the belly). There has been small buying of TY contracts and receiving in USD 5y swaps since NY arrived, but again nothing huge.

Asia put in a mixed session, with South Korea cutting rates (25 bps to .5%) as expected and RBA talking about sufficient QE and their belief that negative rates will not be warranted. Other than those markers that weren’t even surprises, it was a very quiet session. The JGB 2y auction went very well, helping the 2y yield drop 1 bps on the session while JGB 10s closed down .5 bps as the curve steepened mildly. Aussie 10s shrugged off the RBA comments to close flat, while Kiwi rates backed up 2.25 bps in an otherwise quiet session. Asian equities were mixed, with Hang Seng down again as one would expect (-.75%), China mixed, but the Japan following the US lead from Wednesday and closing up 2.3%.

It has been frankly a very boring session in Europe. No data, couple auctions, and a decent corporate calendar in EUR space is about it. UK 7y gilt was a bit disappointing (soft bid to cover, 2.3 bps tail), but the 30y more than made up for it, with huge bid to cover and aggressive overbidding. Long end of the gilt curve is outperforming, with good buying continuing after the supply, but 10y sector is getting treated like a red-haired step child. RV accounts unwinding 10s30s flatteners out of the auction, real money selling UK 10s to buy 30s, and macro account selling gilts to buy bunds, as 10y gilts trade .7 bps higher and 30y gilts trade 1.25 bps lower in yield. PEPP-inspired buying has shown up for the first time this week in EUR rates, largely on the back of the .08 year extension for Euro Treasuries this month, with belly and intermediates leading the way. Month end activity and dearth of news today has largely kept peripherals in line. European equities trade slightly better ahead of the US open.

Today’s calendar is fairly busy, with claims, durables, income/consumption, and GDP revision all at 8:30 AM ET, followed by home sales at 10 AM, and of course a dose of $38BN in new 7y notes at 1 PM ET. Williams (11 AM ET) and Harker (3 PM ET) are the only Fed speakers on the docket as we close in on Fed blackout (after tomorrow). Don’t forget month end extensions (.14 years in T’s and credit, .07 years in mortgages) and tomorrow will be first notice day for futures, so September will become front month after today.

All right, this is getting very old. Clearly risk is being driven by positions and the position is SHORT! At leas for now. Meanwhile, market just STUCK for Treasuries. Had another small break signal yesterday, seemed easy enough for 5-6 bps–THE WRONG WAY! I am completely turned around, and seemingly so are most people. Market trades short between 70 and 72 bps yield in 10s, but trades long against 62 bps level. That can’t be, not in 10 bps, but we have done that round trip three times in the last 10 sessions. Getting breakout signals today again. Month end? At .14 years for an extension, that should be pretty bullish. Sure we will end the day at 70 bps in 10s, just to make it hurt. Going to try to stay objective here, but bitterness keeps blinding the view. For choice today, looks like 139-12 to 138-28+. Take out either of these levels and you SHOULD (should should) tack on a quick 6 bps. Says you are supposed to run, and that run should be higher in price, but that has not worked in two weeks. Support comes in today at 138-31+, the 138-28+ objective, 138-22+, 138-14+, 138-02 (objective if you take out 138-28+), 137-28, 137-22. Resistance comes in at 139-07, 139-09+, the 139-12 objective, 139-15+, 139-19, 139-27, 140-02 (objective if you take out 139-12), 140-18, 140-24.

Enough for now…