risk off as markets look to exit recent coiling and vol goes bid…(Wednesday)

Markets have moved aggressively to risk off today, finally looking ready to break out of the recent coiling we have done since the middle of last week. After a quiet Asian session, focus has chosen to focus on jump in Spanish COVID-19 cases, skepticism of lock down in Europe ending soon, continued bailout issues among the Eurogroup, and weak data although not unexpected out of the US. As of 8:45 AM ET, Treasuries are 2-10 bps lower in yield in a major bull flattening while US equity index futures are down roughly 3% forty-five minutes before the cash open.

Treasuries basically flat-lined around unchanged throughout the entire Asian session, moving less than 1.5 bps for the better part of six hours. There was some small Asian bank selling of 5s and paying in USD 5y swaps before the Tokyo lunch, but there was slightly better buying in the long end. There was also a block flattener that went through in futures at 10:05 PM ET, as client did $180K of DV01 in 7s30s, buying 800 USM for 177-29 and selling 2000 TYM at 138-06. For fact, Asian real money accounts were better buyers of USM and WNM contracts after Tokyo lunch: while TY and FV traded at less than 50% of their ever-decreasing 20DMA, WN contracts traded 173% of average volume by the time of the London handover. Asian central banks were seen buying 7s and very small amount of mortgages ahead of the European open as per usual.

Locally in Asia, Australian rates outperformed, simply on getting through more AUD issuance, today in a 4.5y TAP, as 10y there was 2.5 bps lower in yield on the session. JGBs were quieter again, with yields there mixed to 1 bp higher in a small steepener, while New Zealand rates backed up slightly after the rally yesterday, backing up 2 bps on the session. Not a lot to talk about here. PBoC cut 1y MLF by 20 bps, but that was expected. Asian stocks were lower by marginal amounts as US equity index futures traded under mild pressure throughout the Asian session: NIKKEI -.5%, China down between .5% and 1%, Aussie ASX down .4%.

From the open in Europe, Treasuries traded risk averse. The buying of long end by Asian real money accounts picked up, this time adding cash 30s to the WN and US shopping cart. Belly of the curve caught a bid on macro selling of bobls to buy US 5s (popular trade these days given the funding that will eventually be needed if EU is to remain as such), while US front end caught an RV bid ahead of libor settings (buyer of 10K EDM0 futures). Official Chinese concern voiced over the Trump threat of ending funding for WHO mid-morning in London only served to increase the risk off sentiment. Oil came under pressure, Brent trading to it’s lowest level in 18 years now, resulting in even bigger flattening bid to Treasuries. There were puts bought on USM and TYM put spreads added (largest being 5K TYM 136/137.5 put spreads lifted for 19/64), as accounts are looking to add some gamma.

Europe saw deal-related selling in Buxl on the open, but the buying in bunds against peripherals overwhelmed any selling programs. Italy has traded 25 bps wider to bunds, currently at 23 bps wider, with Greece not far behind. Good German 25y auction of course only increases the bid for bunds, as they lead the move today globally. Any effort sell ahead of the Dutch 10y or the German 25y by RV accounts and dealers was easily absorbed by the markets. Italy’s Angelini was on the tapes talking about increased need for issuance in BTP 10s and the need for another EUR 50BN in liquidity only adding to the risk bid. Gilts meanwhile have simply decided to follow the lead of bunds and Treasuries, underperforming the move slightly on limited flow, after an average 10y gilt left market uninspired. European equities are trading down between 2.5 and 3.5% with Italy leading the risk off.

We just had awful retail sales and Empire State Manufacturing numbers, neither of which are really a surprise, but will be blamed for another leg of risk off. They aren’t responsible, but everyone has to have a culprit. We will also get IP/CU at 9:15 AM ET, NAHB Index at 10 AM, the Beige Book at 2 PM, and TIC data at 4 PM. None of it really matters although we will as always pay attention to the Beige Book. There is also a G20 FinMin and CB heads video conference at some point later this morning, so watch for those headlines too. Buyback will kick off at 9:50 AM ET and wrap up 12:20 PM for another $35BN over four sectors.

Okay, so the coiling looks to have mercifully come to an end, and shockingly the breakout is to lower yields again. Who woulda thunk it???? Vols are bid in the bull flattener, with US 30s finally back through last week’s auction level of 1.325% (1.312% right now). Pullbacks today should be shallow and bid for as the COT report we highlighted from Friday shows where the first level of pain is in US and WN contracts. While gamma is well bid against vega at the moment, there is still opportunity to get some protection in gamma space. As usual, like the idea of synthetic call, but this time want it in the belly; long end should lead early, but once the duration guys get their bonds on and the specs get carried out, the belly will be the place that stabs people in the heart. Would look at adding 20% delta puts, exchanging the deltas, on FVM or TYM, your call into the June expiration (5/22 expiration, 37 days). For choice today in TYM, let’s call the range at 139-09 to 138-11+, after an overnight range of 138-27 to 138-06. If market pulls back and holds 138-20+ early today (single prints below), watch out! Further support comes in at 138-12+, the aforementioned 138-11+ objective, 138-02, 137-28, , 137-21/22, 137-16. Resistance comes in at 138-31/139-00, the objective at 139-09, 139-13+, 139-22, 139-28. That should do it for now.

Have a good hump day and please be safe and healthy out there….