risk on–until report of US tariffs on European countries….serious (Wednesday)

Markets have traded mixed overnight but have returned to low volume mode, better bid to risk during Asia but definite risk off during European session. Hard to identify a catalyst for either trade, but definitely the market moved to risk off at roughly the same time that reports surfaced that Trump administration is weighing new tariffs on France, Germany, Spain and the UK (but not Italy??? Oh yeah, he loves us Italians!!). As of 8:30 AM ET, Treasuries are .5 bps to 1.5 bps higher led by the belly ahead of supply today and tomorrow, while US equity index futures are trading less than 1% lower ahead of the cash open, after having based a few hours ago. (OK, I’ll take up on the day, what the heck.)

Treasury and futures flows overnight were quite limited, average at best over the period of the last month. There was Asian real money buying of spread product after Tokyo lunch, Japanese real money buying of 10s, better Asian bank selling in 7s, small RV selling of 5s outright and on the curve against 2s and 10s ahead of record 5y supply today. There was small Japanese real money receiving in 5s around Tokyo lunch that turned to better Asian bank paying after the break. Central bank lifted 10s and spread product (mainly mortgages, but still small) as per normal, with some Asian macro buying of spread product on the European open.

The news report of US tariffs on European countries took Treasuries off their lows in early European morning, after they had been dragged lower on concession building for UK and German supply. Treasuries saw hedge fund covering in 10s, macro receiving in USD 5y swaps, outright and against 7y swaps on the curve. Volume was light after the risk off move until NY arrived, at which time there was better fast money selling of TY contracts and RV selling of 5s in a very small uptick for flow.

Asian session was about risk off and curve steepening. The AOFM reopened 4/29 TAP that has been largely left alone, but still disappointed with limited bidding and a large tail (3.6 bps), as Aussie 10s were 1.5 bps higher in yield on the session. New Zealand backed up 3 bps after announcing auction syndication, while JGBs backed up .5 bps with 20y 1.5 bps higher in yield ahead of tonight’s 20y auction by the MOF. Curves steepened across the board in Asia, while Asian equities were mixed, basically unchanged in the NIKKEI while marginally higher in China without much theme other than watching US equities continue to grind higher.

European session was about concession building for auctions, none of which went well at all. UK 4y gilt sported a large 3.6 bps tail, while 35y gilt had a smart 16 bps (!!!) tail versus an average tail of only 6.5 bps. Both auctions were sloppily bid and market did not appreciate the supply. German 15y had a smaller tail than average but was sloppy as well and not very well bid at all. Gilts have seen decent hedge fund selling throughout the session, before and after supply, only catching a small bid in the last hour ahead of the normal BoE QE operation. Buxl lost its outperformance on RV selling into the supply event, and then hedge fund stop outs after the extremely disappointing event. Even the tariff story and pressure on European equities have done little to bid Europe.

Today’s calendar for data is worthless: MBA was out already, and Home Price Index will be released at 10 AM ET. Evans speaks at 12:30 PM ET, while Bullard talks at 3 PM ET. Most important event of the day will be Treasury double-barrel supply of $20BN 2y FRN reopening and record $47BN new 5y auction at 1 PM ET. Enjoy that one after lunch…. With the 7y on deck tomorrow, finally time to acknowledge the month end extensions everyone has been yelling about for the last week. Not that it’s anything crazy like last month, but Treasuries extend .08 years (average), MBS extends .06 years (avg), EGBs extend .09 years (touch above avg) and Gilts extend .16 years (well above average).

For choice today in TYU, call the range at 138-23+ to 138-10, after an overnight range of 138-25 to 138-17. In simplest terms, unless I am more lost than ever, market owes us a test of this 138-10 level/aka .75% in cash 10s. Four different indicators are looking for that test. Then it’s whether you hold there or make a run for .81% (roughly 137-26). Or you do hold there and the next move is .60%, but think market is not short enough here for that. Support in TYU comes in at 138-16 (small, should not hold) 138-10 level, 138-01+, 137-30+, the 137-26 objective, 137-21. Resistance comes in at 138-22, the 138-23+ projected top (unless you hold 137-16 or -10 very early which would be VERY confusing), 138-29, 139-06+, 139-09.

Have a very good hump day and good luck with those auctions if you have to participate….