risk off theme continues, quiet night but anxiety is high….(Thursday)

Markets trade better to risk off again this Thursday, with increasing COVID cases and global restrictions weighing on sentiment. Activity was brisk early in the Asian session as Japan announced yet another dramatic increase in cases, but tailed off markedly during the European session. Treasury yields are flat to 1.5 bps lower after the pullback in a bull flattener (of course!), while US equity index futures are small lower ahead of data and the cash open.

The Asian open saw buyers out of the gates in Treasuries. CTA buying in FVZ, TYZ, and USZ was the early theme, followed by Japanese lifer buying in 30s when cash opened, followed by Asian real money buying in 5s, TY, and 30s. Treasuries held a bid as hedge funds lifted cash 10s and unwound FV/US steepeners. After Tokyo lunch, better selling by Japanese real money in 10s and 30s, along with WN contracts helped Treasuries pull back. The lows of the pullback came at 2:01 AM ET, as block sale of 1500 USZ for 173-02 saw $310K of DV01 dumped in 30y sector.

But from about the time London arrived, Treasuries reversed the small weakness and made new highs for the session. Central bank buying of 10s, WN ultras, and mortgages was not as large as recently, but still underpinned the market. Macro accounts sold more of the EDZ1/EDZ2 spread at 4.5 bps (collapsed from 6 to 4 yesterday after the IBA statement on possibly extending libor for special cases!) while EDH2 was sold outright at 99.71 in decent size. There has been deal-related paying in USD 30y swaps since mid-morning in Europe, with today possibly the last day to issue before the holiday-influenced slowdown in that sector. Swaps actually traded fairly quiet for a change, the main theme of the night being interest to pay in the belly outright and against the wings, especially against USD 2y and 3y sectors. The new 20y traded well early in London on some hedge fund buying, but RV account has been better seller of US 20s outright and against 30s since NY arrived. Some short covering in equity indices on the NY open has helped Treasuries pull back off their overnight highs, but activity has been muted since mid-morning in Europe.

Asian session saw good post-auction demand for NZ bonds, outright and against Aussie bonds, with the latter holding up on the RBA buybacks overnight. Japan traded largely sideways in rates, fixated on the spiraling number of COVID cases in country. JGB yields were flat out to 10y and .5 bps lower out to 40y, Aussie 10s were also flat, but Kiwi 10s were 2 bps lower in yield. NIKKEI was down small (.4%), while rest of Asia was mixed, small pressure on Hang Seng (-.7%), China better (+.5%).

Bunds were under pressure early, despite the general risk off theme, on concession building ahead of large sovereign supply out of France and Spain. Bunds saw dealer selling in 5y bobls and bunds, with some small RV buying of bobls against Spain and Italy. Spanish 5y issuance went fine, 7y was better. French 3y, 5y, and 7y bonds all came in line to recent supply events, while Linkers in 6y and 16y were fairly well digested. There has been a big BTP seller mid-morning in Europe that saw bunds underpinned, but the bounce off the lows in equities has seen better fast money selling of bunds and buxl. Italy trades 1.5 bps wider to bunds on the large sale program, but rest of peripherals are largely in line. Gilts opened bid on the increased domestic lock downs, along with fears that Brexit is taking another bad turn, but a report that Barnier had delayed his EU ambassadors update from tomorrow until middle of next week has market thinking that progress was made overnight. Whatever. Again, gilts off their best levels on the minor bounce in risk assets, as macro accounts have been selling 20- and 30y sector of gilt curve. European equity bourses are down marginally after the bounce (about .5% across the board).

Today brings us weekly claims and Philly Fed at 8:30 AM ET, followed by LEI and existing home sales at 10 AM, while wrapping up with KC Fed at 11 AM ET. Mester speaks at the bottom of the hour, 8:30 AM ET, with Rosengren speaking at 1 PM ET. Treasury will reopen $12BN in 10y TIPs at 1 PM ET, as that should not be a big event, just an extra helping.

Says here that Treasury bulls got everything they could have wanted yesterday. An auction that saw enough support but no one had to pay up and then the curve bull flattened aggressively after the supply. Hmmm, more support for the idea that this duration problem has not gone away. And you see 30y spreads continuing to widen as more anecdotal evidence that the market is putting the Fed in play ahead of December 16th for a WAM extension. Will add to that Stone McCarthy weighted duration came out yesterday at 100.0%, nothing to scream short but still as short as they have been in some four months. Just saying, wouldn’t be short those 30y tails for choice, just like wouldn’t be short tails on ED greens right now given the new focus on whether there will or won’t be a libor setting at the end of next year for “special situations.” Just saying.

For choice today in TYZ, let’s call the range at 138-20 to 138-06+, after overnight range of 138-13 to 138-07. Should extend on the upside and do measured move off yesterday, while filling in distribution below 138-08. Support below comes in at 138-06+ objective, 138-01, 137-26, 137-23, 137-19, 137-14; resistance comes in at 138-14+/15, the 138-20 objective, 138-25, 139-02, 139-04+, 139-08+.

Have a great Thursday,