risk way tougher than little geopolitical tension, or bad positions? (Wednesday)

Markets have shrugged off some early geopolitical tensions to trade better to risk (what else is new?) since London arrived as we head into this lovely summer hump day. Further Chinese controls against a second COVID-19 outbreak in Beijing also weighed on risk early. Volume was decent during Asian hours but has slowed to a crawl since shortly after the European open. As of 8:15 AM ET, Treasuries are mixed, pivoting around 7y sector of the curve, with 5s30s now 1.25 bps steeper on the session. US equity index futures are trading marginally higher ahead of the cash open.

Treasuries opened flat to their 5 PM marks in Asia, but caught a bid shortly after the open on Japanese real money buying of US 10s and 30s. Tensions between China and India continued to rise, while North Korean announcement of more troops moving along the demilitarized border with South Korea added another level of angst. There was Japanese lifer receiving in USD 30y swaps, and buying WN contracts as well that helped underpin Treasuries for most of the Asian session. However, RV used better levels to chip away at setting a better short for today’s 20y reopening. After being pulled lower in early European trade, Treasuries bounced on central bank buying of 10s, 30s, and mortgages (the usual!), but since have seen nothing but better macro account selling of 30s outright and on spread against 5s, along with more RV selling of 20s, as 5s30s has gone from 1 bps flatter in Asia to 1.5 bps steeper now, with 20y weighing as well. Since NY arrived, trade has been nil, just mirroring eminis, which makes for a brutal start to our day!

Japanese exports fell a larger than expected 28.3% last month (26.1% expected), largest drop since the Great Financial Crisis and heavily impacted as one would expect by US demand drop. Even with the soft data and Korean concerns, there was better paying in JPY 30y swaps for a second session by overseas accounts as the LCH/JSCC spread widened further, and helped steepen the JGB curve further, while belly and front end of JGB curve found better domestic support. AOFM issued AUD 2BN in 05/32 TAP, but to the softest interest in over two months. JGBs closed flat in 10y sector, but 1.5 bps higher in 30y yields with curve continuing steepening bent, while Aussie 10s closed 2 bps lower and Kiwi yields drifted 1 bps higher. NIKKEI was down .5% on the soft data and Korea story, but most of rest of Asia was up small, buoyed by yesterday’s US performance but pressured by early risk off sentiment.

Bunds weighed on Treasuries early in the European session on corporate supply concerns, with gilts then joining the party ahead of sovereign supply in the UK. Flows were much better to selling bunds (auction) and buxl (corporate issuance) by RV accounts and dealers, adding of 2s10s steepeners by macro account in EUR swaps, selling of 10y gilts by hedge fund, and levered money selling RXU contracts. Good turn for risk helped keep pressure on all session. Very telling that if one looks at a contract board, all the short dates are “green” while longer tenors are red. The beat goes on. Bunds bounced a little, even after a shaky 10y auction (little bigger tail at 1 bps, little smaller overbidding), and have seemingly found some footing as supply gets digested. UK saw an average 3y gilt auction (small tail, ok bidding) but a sloppy 21y auction, with a 9.2 bps (yikes) tail along with soft bid to cover and light overbidding. Gilts have digested corporate supply a bit better than bunds have, so we’ll see how things play out this afternoon. European peripherals are a bit wider thanks to BTP issuance/management, but nothing major. European equities are up between .5% and 1% across the board in a nondescript trade, likely waiting on direction from the US.

Today in the US, we will get housing data at 8:30 AM ET, then we will settle in for Round II of Powell’s semi-annual testimony to Congress (today before the House Financial Services Committee) at 12:00 PM ET, virtually of course. There should not really be anything new from the Chairman today. And there better not be, because we have the big $17BN first reopening of the new 20y bonds issued last month at 1 PM ET. Lastly, Mester will speak at 4 PM ET on the Fed’s response to the COVID-19 pandemic.

First of all, if consensus for the week was $35-$40BN in HG issuance, but you issued $28BN yesterday alone, I would say there’s a story afoot. And the story is there is more to come. Today being no exception. As long as equities and spreads trade better to risk, the water will flow. Today looks to be a repeat, with BP set to lead via two perpetual bonds (NC5.25 and NC10), which I won’t comment how crazy that is, but the new idea this week on callables and perps is sure feeding the Street some vega! This will be worth watching.

Well, at least market did what it was supposed to early yesterday. Traded down and held the projected low in TYU at 138-07, then started toward the high at 138-23 but lost momentum at 138-22 as the supply just overwhelmed. The curve steepener worked in all directions yesterday, as it does globally right now, which seemingly keeps central bankers happy for now. So for choice today in TYU, let’s call the range at 138-25 to 138-10, after an overnight range of 138-21+ to 138-11+. Support in TYU comes in at 138-10, small support at yesterday’s 138-07 level, 138-01+, 137-30+, 137-21, 137-15, 137-11; resistance comes in at 138-21+, the 138-25 objective, 139-00, 139-03+, 139-06+, 139-09, 139-13+.

All right, be safe and have a good Hump Day,