rush to issue fuels further risk on sentiment to start big week….(Monday)

Markets trade slightly better to risk to start the new month, buoyed by some positive economic and sentiment data, along with the continued strength of the tech sector. A quickly growing and impressive corporate calendar (i.e., Google, Astrazeneca, Xerox) add further to the risk on mentality for now. As of 9:00 AM ET, Treasuries are 1-4 bps higher in yield in a bear steepening while US equity index futures are trading marginally higher ahead of the cash open.

Treasuries saw better selling from the outset in Asia on best volume in several weeks, with hedge fund/fast money types eager to pounce on the passing of the month end extension trade. Selling was seen in US 10s by fast money types, while hedge fund added US 2s10s steepeners in small but US 5s30s steepeners more aggressively. Japanese real money sold 5s and WN ultras as well, with better Japanese GDP report adding to the risk sentiment, weighing on Treasuries. A block buyer of 10K in the popular TYZ 139 puts (52/64 at 8:38 PM ET) also weighed on Treasury futures. A better than expected Chinese Caixin PMI (52.8 vs expected 51.1, the highest reading since Jan 2011) took Treasuries to their lows. Better buying emerged after Tokyo lunch, with Japanese lifer lifting WN, while Asian central banks bought 5s and spread product, mostly mortgages again. London saw volumes dry up a bit with some early London bank buying of US 7s and receiving in USD 5y swaps, but the bear steepening resumed after a stronger EZ PMI report (51.8 vs 51.2 prelim and estimate). European real money bought 5s, but macro fun added UST 5s30s and 10s30s steepeners, while also buying long-dated gilts against US 30s. A second 10K lot block buy in the TYZ 139 puts, this time for 51/64 at 3:44 AM ET, pushed Treasuries back toward their lows. Early NY trade saw resumed rate lock interest to pay in long end of USD swap curve, along with fast money selling of US classic and TY futures.

Asian equities were mixed: up 2.25% for NIKKEI, up 1.6% for most of China, but down .5% for Hang Seng and most of the commodity-based Asian economies. JGBs saw steepening pressure/unwinds after the big flattening party post last week’s 40y supply. JGBs saw yields close up 1.5 bps, while a quiet session in New Zealand saw Kiwi yields up .5 bps as Australian bonds were closed for a public holiday.

Gilts are mixed ahead of Thursday’s highly anticipated BoE meeting, with small steepening pressure developing over the last few hours, amid better buying in front end ahead of potential surprises on Thursday (did anyone say negative rates?). Softer UK PMI (53.3 vs preliminary 53.6) have been marginally supportive of gilts. Better French, German, and Italian PMI reports helped underpin risk. Long end of peripherals getting sold hard after healthy month end extension pressures passed, causing some better buying in buxl but selling in belly via bobls and bunds. Spain and Italy lead EU peripherals higher in yield, while equities show gains between 1% and 2% throughout Europe, except for some mild underperformance in Spain.

PMI (9:45 AM ET), ISM and construction spending (10 AM ET) are about it for today, although market will cast a glancing watch on vehicle sales throughout the day. Big events this week in US are Wednesday’s quarterly refunding announcement and of course Friday’s NFP report. Fed speakers are through the blackout period, so we will hear from Bullard (12:30 PM ET), Barkin (1 PM ET) and Evans (2 PM ET), all speaking on the economy in virtual forums. Corporate calendar is growing quickly, as everyone will look to issue before Wednesday’s refunding announcement in a quiet week for Treasury supply.

We are at a real crux here for the next 20 bps move. There are any number of technical signals that portend a back up in rates, but similar longer-term patterns that argue for a continuation of the rally. Open interest came off in FV (-25K), TY (-55K!!!) and US (-11.5K) on Friday, not a good sign for the bulls as that seemingly indicates that shorts were squeezed out on the last day of the month at the highs of the move. Classic rejection EXCEPT for the fact that Treasury futures all managed to hold onto positive net changes for the day. Meanwhile, the bulls are heartened by a large jump in spec shorts added in the period ceasing July 28th, as there seems to be no stopping specs from trying to fade the long end for the last eight weeks. Big issuance in dollar space by some smart corporate names in theory argues for a top, but we have digested much of the rate locking without coming much off the best yield levels of last week. The yen-strength induced buying pressure has subsided a bit as we had a big hold against 104-handle in JPY, but there is another break of 105.00 coming (currently all the way up at 106.29) that will test the mettle of the short base further. It will be an important week, potentially a seminal look this week, that is a given. Stay tuned.

As for today, this issuance calendar is spiraling out of control. Expectations were for a “busy” Monday ahead of $30BN in HG issuance this week. Heck, some of the numbers bandied about for Alphabet and Astrazeneca could get you close to $30BN in issuance today alone. Think that weighs on Treasuries eventually, so for choice today in TYU, let’s call the range at 140-01+ to 139-24+, after an overnight range of 140-05+ to 139-28+. As long as you stay below that 140-01+, pressure should build into the deal pricings this afternoon. Get above 140-01+ though and you will take out the highs of the move from Friday at 140-06 on your way to 140-17+. Above there resistance comes in at 140-21, 140-24+, 140-30. Support comes in at 139-26, the aforementioned 139-24+, 139-19+, 139-11+, 139-07, 139-01+. I think there are ways to capitalize on this week via conditionals, but I wouldn’t play from the short vol side and think there will be more prudent choices to make later tomorrow from the long vol side with a better sign for the market’s next 20 bps in the meantime. Hope that’s correct….

Have a great Monday,