risk left, risk right, choppy night…and 7y auction on tap (Thursday)

Today has been the tamest session in a full week, but it doesn’t feel like anyone is breathing easier. Every market has traded either side of unchanged, and volume remains decent as we were risk off in Asia and risk on for early part of European session. As of 8 AM ET, Treasuries are within .5 bps of unchanged while equity futures are barely lower on the session.

Asia opened risk off, with Treasuries forced higher by combination of risk and large follow-through bid to Asian fixed income markets. Aussie rates rallied again, with yields down 2-4 bps across the curve in a minor steepening as further odds of next move being a rate cut were priced into market. JGBs saw 40y lead way higher by rallying 4 bps to a multi-year low yield, the driver being normal fiscal year end, while JBM9 futures made a new contract high overnight. Asian real money bought US 5s and 7s, but there was some corporate account selling of US 10s and 30s for year end. Japanese real money was better receiver in USD 5y and 10y swaps, while RV types spent the session working into 2s10s steepeners on the USD swap curve. There was some buying of spread product, but not as focused on MBS as has been the case for the last week. As US equity futures followed Asian equities lower into Tokyo lunch, better Asian bank buying of 5s and renewed Asian real money interest in 5s and 10s took Treasuries to their highs of the night before backing off slightly ahead of the hand off to Europe. NIKKEI finished down 1.6% ahead of fiscal year end, weighing on rest of the Asian bourses as Chinese shares were off .7% to 1%, with only the Hang Seng eking out a small gain.

The European session opened to better selling in bunds ahead of supply today; that took Treasuries slightly lower on lighter volume. This scheme (full pun intended) proposed by the ECB for tiered deposit rates has amazingly helped to stabilize bank shares today and gave risk a bid after the European open. Sentiment took hold as macro account sold US 2s and 5s both outright and on the curve against 10s, the antitheses of what they have been doing the last four sessions. There was better deal-related selling of bunds and bobls ahead of the BTP issuance (2s/6s/10s, avg duration of 5y, went okay which is a win these days for Italy), while real money traded on both sides of bobls (selling to make room for BTP paper, buying for duration). The general theme for European morning was just that: selling 2s and 3s in UST, selling bobls in Germany, selling short sterling reds, and selling some vol. There was a block seller of 4247 TYM9 for 124-19 at 5:04 AM ET ($330K of DV01 in 7y sector sold), a conditional seller German front end via the DUK 111.00/111.70 risk reversal (taking in 4 to sell the call) and decent buying in TYK puts. Tame German CPI figures were ignored during the risk on event, but seem to have caught people’s attention since about the time NY walked in, as we are moving back toward risk aversion in the last sixty minutes. Flows have been light since then, but there has been better buying of US 2s and 5s by dealers, as equities in Europe turn lower and weigh on US index futures.

Today’s calendar includes final look at Q4 GDP and weekly claims at 8:30 AM ET, followed by pending home sales at 10 AM and KC Fed at 11 AM. There are a plethora of Fed speakers today: Clarida at 9:30 AM ET, Bowman at 10, Bostic at 11:30, Williams at 1:15 and Bullard at 5:10 PM ET. But let’s be honest, the big event of the day is the final leg of this month’s Treasury supply, with $32BN in new 7s to be auctioned at 1 PM ET.

Choppy morning to start, but when the smoke clears, think we will see Treasuries underpinned after the supply. Even though the month end extension for Ts is only .06 years, there is demand for paper and everyone is expecting Japan to do their usual early April (i.e., new fiscal year) buying. For choice today in TYM, let’s go with a range of 125-02 to 124-12, looking to test the low early in the session. If there is some way we can get through 124-12, support comes in at the important 124-08+/08 level, 124-04+, 123-30, and of course the seemingly impenetrable 123-28 level. Resistance above 125-02 comes in at 125-07+, 125-11/11+, 125-18 (we better not see 125-11 today!). If we get early risk on, might get enough of an offer to buy some gamma into 5y tails….

Have a good opening day of baseball season!