So yes, this is becoming like a complete repeat of the trade negotiations from end of last year: you can’t look away for a second or you may miss an utter reversal in risk. Risk markets traded defensively throughout the Asian session, but turned on a dime at 3:15 AM ET, when first Twitter (oh boy) and then SKY News reported drug developed by UK researchers at a Chinese university showed success against the virus. As of 8 AM ET, Treasuries are 2.5 to 4 bps higher in yield, led by the belly, while US equity index futures are trading .5% to .8% higher ahead of the cash open.

The early Asian session saw Treasuries better bid, with Japanese real money buying Treasuries from the outset in 10s and 30s. Credit desk was again buyer of 30s, while there was a hedge fund covering by receiving in USD swap 5y5y. Japanese banks used the bid to rates and pressure on spreads to pay in USD 5y swaps, but Asian real money picked up the baton from Japanese accounts and began buying 5s, 10s, and 30s into and through Tokyo lunch break. The buying continued with central bank lifting 5s ahead of the European open, helping Treasuries trade 1.5 to 2 bps better in yield on the hand off. Soft Asian PMI reports (except a slight beat in Australia) underpinned the risk off sentiment. There was some selling of call spreads and then call ratio spreads in Eurodollars throughout the Asian session, taking off parts of this large position put on during the first month of the year.

Locally, Asian fixed income markets were under pressure after yesterday’s risk off rally in US, with JGBs 2 bps worse on the US hangover, while long end of JGB curve was sold as concession for tonight’s 30y supply. Meanwhile, Aussie dovish spin yesterday turned to a bear today, with Tuesday’s RBA meeting now being viewed bearishly as Lowe comments seemingly reiterated his reluctance to cut rates any further, a completely different view from the way the RBA’s statement had been interpreted just 24 hours earlier; that was enough to back up Aussie 10y yields some 10 bps, and take Kiwi rates along for the ride. Go figure. As for equities, they rode the American wave, as Asian bourses were up between .75% and 2.5% in a sea of green, led by Chinese indices of course.

The European open saw fixed income better bid to match the Treasury move in Asia, but decent UK service PMI (53.9 vs 52.9 flash) but gilts on the defensive before the Twitter/SKY News story broke on a vaccine/treatment for the virus. By the way, there is talk that it’s only a vaccine that won’t be ready for months, but it’s risk on so don’t get caught up in the details. Markets turned on a dime with the news, stocks rallying almost 1% in Europe and US index futures. There has been good selling by hedge funds in 10y gilts and short sterling greens that began early in the day and accelerated on the virus story. Bunds have put in a quieter session, largely being dragged lower by the move in UK and US rates. There has been deal-related paying in long end of EUR curve, outright hedge fund selling of bobls (5y); there has also been selling of bunds against BTPs and GGBs, both of which are enjoying yet another day in the sun for reasons that I just refuse to acknowledge or deal with right now. This will not end well there, but these places are getting a free pass for now given everything else going on in the world. BTPs trade almost 5 bps tighter to bunds this morning, while GGBs trade 3 bps tighter. All I can say is “such silliness.” European equities are roughly 1% higher across the board.

Today’s calendar includes ADP at 8:15 AM ET, Trade Balance at 8:30, Markit PMI at 9:45, and ISM Non-Manufacturing at 10 AM ET. More importantly, the Treasury will announce composition of next week’s quarterly refunding in 3s, 10s, and 30s, likely along with details of the reintroduction of 20y bonds at the May refunding. This will be the focus for Treasury traders all day today. Brainard speaks at 4:15 PM ET as well, just in case.

So looks like we are finally going to fill that value gap down to 130-12 in TYH. Then we’ll see where we go from there. For choice today in TYH, call the range at 130-24 to 130-04+. Just think there are some bad positions that need to be cleaned out. Still like the idea of a synthetic call in classic bond futures given the relative cheapness of that sector on the exchange and the curve. Yesterday’s buy of a USH 159 put with delta would be best rolled down to the 158 put today, or buy the 158 put with delta right now. This works nicely. All right, gotta run, time for the ADP report….

Stay warm and dry this hump day,
mjc