risk takes the day off, or maybe it should be “heads for cover”…. (Monday)

This has not been a good weekend for risk. After putting a positive spin Friday on the late week meetings between Washington and Beijing, sentiment this weekend turned markedly bearish, while by Sunday there was heightened concern that Europe would get caught up in the US tariff maneuvers. Lastly, two Saudi tankers came under attack off the UAE coast in the Gulf, an act that threatens to heighten global instability. As of 8 AM ET, Treasuries are 4-6 bps lower, with the belly leading the way as the long end lags appreciably right now; US equity futures show show losses of between 1.5-2% ahead of the cash open.

Treasuries opened better bid in Asia and then added to opening gains on levered short covering in 5s and TYM contracts. Futures volume in Asia was better than cash, as CTA and other fast money accounts were active buyers of the aforementioned TYM contracts, as well as buyers of TUM and FVM against USM. Asian real money accounts received in USD 5y swaps while Asian banks added steepeners in USD 3s10s on the swap curve. Japanese real money accounts bought 10s, while central bank bought 30s, but in social size at best. A holiday in Hong Kong dampened local trading, while JGBs opened higher but gave up much of their gains as yen and risk-off bid moderated slightly mid-day in Tokyo. Aussie 10s tagged a record low yield at 1.69% before buyers failed to materialize at the afternoon’s 10y tap and yields drifted higher. Asian equities were off between .75% (NIKKEI) and 1.6% (CSI 300) on the risk off sentiment.

Treasuries actually took out their Asian session lows (still held 1 bp better than Friday’s settlement) in sympathy with early pressure on bunds after hawkish comments over the weekend from Villeroy (“making progress” in hitting inflation targets) and Nowotny (expects that EZ will turn up shortly, better 2H2019 growth expected, no expectation of long-term stimulus). However, by the time all of Europe was open for the week, risk had turned tail again as Chinese Foreign Ministry spokesman Geng Shuang said “wait and see” on retaliation, “no information” on future Xi/Trump meetings, and China was considering all its options. That was followed by Trump saying China “should not retaliate- will only get worse” and “China will be hurt very badly.” And with that, risk officially closed its window for today. Confirmation that two Saudi tankers came under attack in the Persian Gulf near the UAE only added to the risk off sentiment, as the gulf has always been taboo for attacks until now. Flow wise, saw macro accounts sell bunds and TYM contracts on the European open, with RV account buying cheaper bobls against rich FV contracts. Hedge funds were better to buy US 10s outright and on the curve against 5s though, and that 5y buying became the winner trade of the morning, as market turned on a dime when the Geng comments hit the tape. European asset managers lifted 5s, FVM futures and 15-20 bps out calls on FVM (11 days to expiration). Bunds bounced on the Geng comments as well, while better dealer buying in schatz and bunds underpinned as Greek yields gapped wider when market got wind of impending Greek 3y, 7y, and 10y issuance; GGB’s are 7.5 bps wider to bunds, while rest of peripherals are 2-4 bps wider to core. Gilts have lagged bunds and Treasuries, still trying to digest the latest polls (Brexit party continues to see uptick in latest polls), as talks between Labour and Tories are set to resume today. Flows have been mixed but largely without theme in UK today. As Chinese tape bombs hit at 8 AM on raising tariffs June 1 on many US products, another round of levered short covering took place, this time concentrated in long end with TYM, 10s, and 30s getting lifted. Equity index futures took another leg lower to be down almost 2% across the board.

Today’s data calendar for the US is bare, as the only highlight this week will be retail sales on Wednesday, and no Treasury coupon issuance on tap for the next two weeks. At least we have a rather large slate of Fed speakers, beginning with today’s appearances by Rosengren, Clarida (together at “Fed Listening Event”, 9:05 AM ET), and Kaplan (1:20 PM ET) before community forum in Texas.

Even after Friday’s rally, still is clear the rates market trades tired up here. Think maybe the lid is being kept on Treasury prices for now by the curve being unable to make a break steeper. If that happens, then it seems that structural short may be again laid bare but at this point that is just slightly more than speculation, based on the move in TU open interest and the state of positioning surveys for the long end. Either way, still makes best sense to buy protection/play the trade (i.e., either scenario) by purchasing synthetic calls in FVM. Had one lifted FVM 115.25 puts (expire 5/24, 11 days to expiry) last week for 4/64 against buying FVM at 115-24, the structure actually made money at a time the market didn’t break the recent range and only steepened slightly. Still would be willing to enter or add on this idea, but given the move, would buy the 115.5 put for 4/64 and buy 20% FVM for 115-31. It’s the cheapest, most effective way to hedge at the moment, although if need to do the long end, better to be involved OTC for 10y or 30y tails. Enough for now, let us know if you wish to discuss or have any questions (you might prefer talking to Andy or Mike instead of me!!). As for choice today in TYM, let’s call the range at 124-15 to 124-06 (range this far has been 124-11+ to 124-03). If we take out 124-15, it could get ugly to the upside with next level at 124-25/25+, 124-31 (2.335% equivalent cash 10s), and then all the way up at 125-18 (2.25% cash 10s). As for support, below 124-06, we will find support 124-00+, 123-30, 123-24, 123-19 (good luck getting there).

Enough for now….have a good Monday and keep your umbrella handy,