risk on, supply highlight again, but volume and liquidity still absent (Tuesday)

It is a second day of much better risk appetite in the markets, with some clear themes throughout the session, albeit still on very light volume on no true liquidity. Treasuries are 3-6 bps higher in yield, led by the intermediate sector ahead of Treasury and corporate supply, while US equity index futures continue to shine, trading roughly 3% higher ahead of the cash open.

Treasuries bounced slightly to start the new day in Asia on some small RV short covering with JGBs surprisingly bid ahead of supply in 30y sector there. That bid to Treasuries was very short lived, as Japanese asset managers wasted little time selling cash 5s and 10s, along with TY contracts. Japanese real money was a better seller of 2s after the rest of Asia walked in, but post-Tokyo lunch saw some buying that stabilized the market at marginally softer rate levels. Asian banks covered in some US 5s and 7s, while also receiving in USD 5y and 7y swaps. Asian central banks lifted 7s and bought mortgages before the European open, then returned mid-morning in Europe to add to those buys.

The local theme is Asia was supply and buybacks, as has been the case lately. The bid to JGBs ahead of the 30y issuance ensured a poor 30y auction, although JGBs did stage a relief rally after the supply event to close flat on the session with 30y and 40y outperforming slightly. Aussie supply was well-received; however, intimations by the RBA of tapering to their buyback program took any wind out of the sails in Aussie rates, leaving Aussie 10s 9.25 bps worse on the session. New Zealand rates followed Aussie yields higher early, but recovered slightly after RBNZ indicated it might expand QE, leaving Kiwi yields 4 bps higher on the session. Asian equities traded firmer, up between 1.75% and 3% for most major bourses.

Even before Europe could open, bunds came under selling pressure and led Treasuries lower. There is a massive calendar of official and corporate supply in Europe, all of which we have known for awhile, but the flow was impressive. There was deal-related selling of bunds, with European dealers also paying in USD 10y and 30y swaps. When Europe did get going, bunds and Treasuries repriced another 4 bps lower; meanwhile, more (hopefully) positive news such as China reporting no new deaths today and Austria relaxing quarantine restrictions helped underpin risk as US equity index futures gapped higher with European bourses. Austrian 4y and 10y auctions were sloppy to say the least, but other sovereign issuance did better: UK 3y gilt saw better bid to cover with smallish tail and 40y sported a better bid to cover although with a larger tail. German 10y Linker size was upped given good demand for the issue, while 30y Linker went well enough. Supply continues to be the theme as corporate supply has now become the focus since mid-morning. European equities are up 3-4% pretty much across the board, while peripherals are small tighter to bunds.

European and US fixed income made their lows shortly after Europe opened and have traded largely sideways to very small better as supply rolls through. There was good RV paying in USD and EUR 10y swaps, both outright and on the curve (against USD 2y swaps and against EUR 30y swaps respectively). European real money was a better seller of 10s mid-morning, while macro account has looked to ply USD 5y30y steepeners in swaps and 2s10s steepeners in Treasuries. Since NY has walked in, we have actually seen bank portfolios receive in USD 10y swaps and buy 5s in Treasuries as well.

Today in the US, we will get JOLTs data at 10 AM ET and consumer credit number for February at 3 PM ET. Shows you how important this is not since I thought it was yesterday! Much more important, we will feast $25BN of reopened 10y notes at 1 PM ET, while Fed will conduct normal POMO beginning at 9:50 AM ET and ending at 2 PM ET; it’s interesting that 7.5 to 30y buyback will run from 12:00 to 12:20 today (40 minutes before 10y auction) and 20 to 30y will run from 1:40 to 2:00. See what impact that has on today’s auction and tomorrow’s set up for the 30y. Lastly, after over $24BN in issuance yesterday puts this week’s projection of $40BN in serious doubt, be interesting to see if we have a blowout day again today. Gotta issue while you can I guess.

So, it wasn’t text book, but we did get that 75 bps trade in the cash 10s that we were looking for ahead of today’s auction. High yield after the European open was .7518% in 10s, tagging TYM support to the tic at 137-24+. That said, think you will have to trade back toward lows at least once more before the auction to set a good short. Vol continues to come in on the risk trade, maybe I could get my arm twisted to buy a synthetic call here in 5y tails, probably on the Board as it should outperform in a rally, but it would be kicking and screaming. All right, for choice today in TYM, let’s call the range at 138-14+ to 137-24+, with an overnight range of 138-15 to 137-24+. 137-24+ was our pre-10y auction objective and it worked. Should hold but if it doesn’t could get ugly. Support below here comes in at 137-20+, 137-15, 137-11, 137-06+ (key!), 136-25, 136-20. Now, if we get above 138-08+, forget everything I said about pullbacks, because we will be done with those. And if we do it early enough, then risk will have rolled over (you are not that far from the zone, but it IS Balloon Tuesday, so maybe later in the week?) and we will likely blow through the 138-14+ level; however if done after the auction, we will wait for 30y supply to pass. Resistance above the 138-14+ level comes in at 138-19, 138-24+, 138-27, 138-31/139-00, 139-09.

All right, that’s enough for today. Have a good Balloon Tuesday….