risk on morning for now ahead of ADP (Wednesday)

Risk on was the theme after reports that May is working on a compromise and the FT reported that US/China talks are progressing. Risk has performed well, with gilts leading global fixed income lower ahead of the US open. As of 8:00 AM ET, Treasuries are 2.5-3.75 bps higher in yield, while US equity futures are up .5%.

Since being a better seller on Sunday night, Japanese real money turned a buyer off the lows later in the US session Monday and has been a buyer since. The best appetite was Monday night/Tuesday morning, but the flow by those accounts has been consistent around that spike in volume. On the other side of the ledger, US asset manager was THE big seller of US, TY and JB (JGB futures) overnight just before the FT article that highlighted progress on US/China talks, then the same account sold bunds on the European open. Asian real money was a good buyer of US 30s, a good receiver of USD 10y swaps, while Japanese real money was a decent buyer of 5s and received in smaller size in USD 3y swaps. There was limited interest on both sides of the ledger in MBS. A strong reading for Caixin General Business index (54.4 vs 51.1 last) kept the risk tone intact through the Tokyo lunch. Locally, JGBs saw early pressure but reversed course when the BoJ kept buyback size constant in belly today, after rumors that it would be cut. Yields in the belly were up 1 bps, but long end actually rallied into supply, shaving 1-2 bps in yield. Strong Aussie retail sales data pushed Aussie rates higher and weighed on Ts and JGBs shortly after the Asian open.

The aforementioned US-based seller of bunds on the European open took Treasuries through their Monday lows, bringing out a round of CTA selling in FV and TY contracts as well as setting off stops in RX contracts. A revision higher for EZ PMI kept fixed income under pressure. Gilts have outperformed on the downside once the bund selling cleared; even a miss in UK PMI (48.9 vs 50.9, slipping into contraction territory as well) resulted in only a momentary risk off trade, as gilts jumped 10 tics and gave them back almost immediately, as UK markets have apparently found an equilibrium while awaiting some clarity from May on her next move. Decent interest to receive in schatz has been followed by tightening credit spreads in OATs and BTPs, as the global theme of the day is risk on/small credit premium. Treasuries saw better RV selling of 3s and 5s from an RV account, the aforementioned CTA selling through Monday’s lows, macro account putting on 2s10s30s fly via USD swaps, a buyer of 9K TYK 122.5 puts for 7/64, but small Asian real money willing to get hit bid side in 5s and 10s while hedge fund covered shorts in cash 5s and FVM contracts when 5s led the move after the European open.

Today’s big event will be the ADP report at 8:15 AM ET, followed by Markit Services PMI at 9:45 and wrapping up with ISM Services PMI at 10 AM. Bostic, George and Barkin speak at 8:30 AM ET at an ABA event in Washington, while Kashkari speaks at 5 PM ET in North Dakota.

I remember seeing a dealer note mid-session on Monday that the best flows they saw in the sell off were buying. Then I saw several others saying the exact same thing later on Monday. Remember that open interest has been better to declining on days we sold off and flat to higher on days we have rallied for the last week (with the exception of the TU note, which just shows expanding OI EVERY day). ADP coming up so keep this short….for choice today in TYM, call the range at 123-09 to 123-29. If we get through 123-09, further support comes in at 123-07, 123-00, 122-27, 122-22. Resistance above comes in at 123-19, 123-24, the aforementioned 123-29, 124-00, 124-05+. Still like the idea of buying 5y tails conditionally….

Good luck today,