risk on, and Japanese accounts surprise the market by selling….(Monday)

Running very late today, but there are several things worth noting. Risk on IS the major theme as now four manufacturing/sentiment indices out of China print positive over the course of the last three days. Today’s March PMI and Caixin reports in China were both stronger than expected, leading to an underlying bid for risk that has continued all session. As of cash open in equities, stocks were up .75% and yields were 3 to 3.5 bps higher, led by belly, before this last leg in risk adding took stocks to up 1% and fixed income down 6.5 to 8 bps now led by the belly.

The Asian session opened to minor risk adding after weekend reports out of China were better than expected; the aforementioned only further supported the earlier sentiment. Asian banks were better sellers of US 5s early in the session, but before Tokyo lunch there was a spike in selling on the screen, followed by Japanese real money accounts selling the same 10s and 30s that started on the screen, as the long end of the US curve led a quick 2 bp backup in yields. By this AM, we were hearing that since Japanese accounts had skipped much of their normal repatriation to end the last fiscal year, they weren’t willing to book some easy profits this year. I don’t know, seems potentially a bit conspiratorial to me, but what do I know? Post the selling, Treasuries spent the remainder of the Asian afternoon clawing their way back to unchanged. Locally, JGBs traded 1-2 bps higher in yield as the JGB curve steepened ahead of 10y and 30y supply on tap this weekend. Very soft TANKAN data, even below low expectations, had little impact on the market. Asian equities were led higher by a 1.7% (Hang Seng) to 3.6% (Shenzhen) jump in Chinese bourses, while rest of the region was up between 1% and 1.6% (NIKKEI).

The European open saw early selling of bunds and Treasuries as once bunds broke through Friday’s lows (166.02) CTAs sold RXM, TYM, and FVM contracts. Block sellers of Treasury futures (2500 TYM for 123-29 at 4:33 AM ET, $195K/DV01; 2679 TYM for 124-000+ at 5:21 AM ET, 205K/DV01), screen buyers of 12K USM 144 puts. Bunds saw real money selling by macro fund, along with some concession building ahead of this week’s supply calendar. Treasuries and bunds caught a small bid mid-morning in Europe on weak German PMI and soft Eurozone flash CPI data. However, better UK PMI more than got us back on the risk train. Gilts saw decent RV selling of 10y sector outright and on the GBP curve, but better RV buying against US 10s. As NY walked through the door, there was better bank selling in 10s, easing the early pressure on the long end.

After the pit open, we got soft headline retail sales data that allowed us to tag the overnight highs before fast money aggressively sold the bounce when everyone realized the revisions to January more than offset the perceived m/m weakness of February. ISM was stronger than expected while Markit PMI was close enough to in line. Construction spending and business inventories were both stronger than expected. The big event of this first week of the Second Quarter will of course be Friday’s NFP report. Hedge funds have been sellers of call skew in FV and TY, with asset managers covering shorts on skew trades via strangles in TY and outright puts in US. There has been better real money buying of long end via OTR 30s and US classics, some RV buying of 30s against both 5s and 2s. The general theme is “taking profits,” although in more cases than people will admit it’s actually getting losers covered at slightly less pain.

Okay, this is a little bit of a surprise to start the quarter, but technically there was reason to see a trade lower still after Friday, and reality is you are doing little harm to overall bullish structure for now, even if reds are 30 bps off their lows from early last week. First note to make on the larger subject: open interest in US classics (-1200), TY (-78K), and FV (-55K) showed healthy drops arguing that Friday’s pressure and lower settlements may very well have been corrective and not necessarily a trend change. As of now, we have held aggressive longer term support at 123-17 in TYM, so let’s see what happens. The “Japanese booking profits to start the year” story is interesting, wonder how realistic it is. If it is correct though, those accounts won’t wait too long to add new positions, especially in the light of 7 bps backup today alone. For choice today in TYM, let’s call the range at 123-17 to 124-05 (high overnight and after retail sales, should not get back above 123-29 today). The Jan 3 high at 123-17 in TYM is a major support level. Support for TY comes in at 123-23, the aforementioned 123-17, 123-09, and 122-30; resistance above 123-29 and 124-05 comes in at 124-12, 124-15, 124-25, 125-00. Like the idea of buying some gamma into 5y, looking at 25 bps low calls via the exchange in FVM (53 days to expiration), or else just buying 3m5y receivers struck 25 bps low now.

Will try to be more on time tomorrow….have a good April Fool’s Day!