risk off starts the week, zero concession for supply kicking off today (Monday)

Markets begin trading this last week of January in clear risk off tone, with holidays and viruses not helping liquidity at all either on the extremes of the moves. We gapped higher on the open across “flight” assets, all in risk off fashion, as Corona Virus continues to spread, while a missile attack on the US Iraqi embassy only added even more risk aversion in the market. As of 8 AM ET, Treasuries are 5.5 to 7 bps lower in yield led by the belly, while US equity index futures are down between 1.6% and 2% ahead of the cash open.

The Asian open saw Treasuries gap 5-6 bps lower in yield, led by a flight bid to the front end of the curve, even as that sector will see a rather large slug of official supply this week. The Lunar New Year holiday took away even more liquidity from the market and the trade became borderline sad. Japanese money managers lifted both 2s and 10s, US money manager was seen buying 5s just after Tokyo open. Levered accounts bought 5s and 7s, while some buying was seen in TYH and USH that was attributed to Friday’s options expiry, again the liquidity issue causing what is normally a mundane flow to register on the blotter. RV accounts then got a bit more active into the European open, using the better levels in 2s to add 2s10s flatteners ahead of today’s 2y and 5y supply. Locally, Australia was closed for Australia Day, leaving only JGBs to watch in Asia; of course, those instruments were dragged higher by the risk off sentiment, with JGB 30y and specifically JPY 30y swaps outperforming on the curve, underpinned by real money adding duration out of Australia and Europe. Chinese A50 futures (cash closed for holiday) were down over 5% at various points throughout the evening, while NIKKEI was down 2%.

The early European trade saw some minor profit-taking in Treasuries, with Japanese real money selling 5s and 10s, RV account selling 5s ahead of the supply (not profit taking), hedge fund selling of 7s outright and on the curve against 10s. However, any bid to risk was short-lived, as German IFO disappointed (business climate fell to 95.9 from an expected 97 and a last of 96.3, while expectations fell to 92.9 versus an expected 94.8 and a last of 93.9). There has been aggressive buying of bobls (German 5s) from before the number right through the morning in Europe, both outright and against 10s in Germany (bund) and France (OATs). Treasuries saw a quick lift in 5s by a hedge fund looking to match the performance of bobls after the data, taking 5y and 10y yields to 8 bps lower on the session before better RV and European hedge fund sellers hit the market. Treasuries came off further as NY arrived, with some deal-related selling emerging in belly, better bank selling of FV and TY contracts, along with RV selling of 2s and 30s. BTPs gapped higher on likelihood of stability in government for the foreseeable future, while gilts have more tracked bunds and Treasuries higher, underperforming against those markets thus far today. European equity markets are down between 2% and 2.25% thus far today.

Today US economic calendar includes new home sales at 10 AM ET, followed by Dallas Fed at 10:30; with the FOMC announcement on Wednesday, Fed is in blackout. The big event today will be supply: at 11:30 AM ET, Treasury will auction $39BN of 6m bills and $40BN of 2y notes, followed by $45BN of 3m bills and $41BN of 5y notes at 1 PM ET. See???? Something for everyone, enjoy because there will be another large course tomorrow.

What to do here? Hide? Take a few weeks off and celebrate the Chinese New Year? Well first of all, if you close anywhere near here, you are going to throw off some extremely bullish signals (reference “breakaway gaps”), as Treasuries have ignored all the bullish signals from a week or so ago. Today is a good “watch day” if one can get away with that; let the dust settle and come up with a plan later today. Want to be short, but could very well be a happy bull in short order by 3 PM ET today. Not even willing to bet on this one. But enough, for choice today, look for range in TYH to be 130-26 to 130-09+ (overnight range of 130-31 to 130-17). If we take out 130-26, we will immediately trade through 1.6% in cash 10s ( theoretically 131-00+ equivalent in TYH), with further resistance at 131-04, 131-07+, 131-13, 131-20+. Right now, there is a gap from 130-17 to 130-12 (Friday’s high), so need to fill that before even thinking about the profile tail on Friday that would take us to our 130-09+ objective for today. In order to do that, will need some help from soft auctions. Auctions will likely tell the tale here today: come strong and well-bid and the structural shorts will be showing their hand, but if they roll over and tail then maybe the longs have gotten a bit ahead of themselves. If you can take out 130-09+, a settle below 130-06 would be highly annoying for the bulls, while 130-02+, 129-28 and 129-16+ represent support beyond there. Patience and thoughtfulness are the words of the day around here….

Have a good day and week,