seemingly boring night just got interesting thanks to the ECB…. (Tuesday)

After a simply anemic night of lethargy in the global markets, we are being besieged with questions about the “break” in Treasuries (2 bps backups are huge these days I guess) over the last 90 minutes. There was Japanese selling in US 30s and old 30s just as NY walked in for fiscal year end repatriation, but the bigger pressure came when MNI ran a story citing multiple sources that the ECB was preparing to buy stocks instead of “illiquid” European bonds. This caused DAX to lead a move higher in equities and bunds to lead a break lower for core FI markets. After we quieted down, at 9 AM ET, Treasuries are 1.5-2.5 bps higher in yield in a steepener, while US equity futures are up just over .5%.

The best, and virtually only, activity of the pre-NY part of the session took place in Asia. Although volume was mediocre, it was actually better in cash for the early part of the night. Asian central banks were buyers of the belly AND spread product overnight, specifically MBS. Japanese real money sold old UST bonds for year end repatriation, but market saw better buying from Japanese and Asian bank types for 5y and 7y duration that helped keep the market better bid. There were two events in a quiet market that had exaggerated impacts on their local markets, with RBA minutes (no real surprise in the release) drove a wave of bank bill buying which caused the AUD bill/OIS spread to collapse and generated good buying out the curve. Meanwhile, long end of the JGB rallied on the heels of a well-attended 20y TAP, albeit with light volume remaining the theme. Asian equities closed very mixed, with changes on the day small across the board as US fixed income traded flat after the offsetting flows in Asia.

Europe was pretty boring to say the least for the morning session. Some small early RV buying of US 10s and some European real money buying of 5s outright and on the curve against 30s faded on a good UK employment report, but the pressure from the better data was short lived as market continues to focus on the soap opera that is the Brexit drama. As mentioned above, activity picked up slightly just before NY walked in as Japanese accounts sold more 30s and some 10s for year end, but things really picked up shortly after 7 AM ET when 20+K RXM traded down from 164.27 to 163.99, taking Treasuries and gilts along for the ride. That trade was on the back of the MNI story about the ECB switching their QE to equities instead of fixed income. Treasury futures saw a block seller of 17K TYM for 122-23+ at 8:28 AM ET (sale of $1.231MM in DV01 for 7y sector) that took us to the lows of the session where we sit currently. DAX has been on a steady but impressive climb all session with the MNI story and the talk of think tank reports (fade that part) adding marginally to the gains.

At 10 AM ET, we’ll get factory orders (Jan) and durable goods (Jan). Then we’ll wait and watch for tomorrow’s FOMC announcement, any good Brexit stories, and of course anything from the ECB now that they have become today’s driver.

Volume in TYM futures at 7:15 AM was a pathetic 130K contracts; it is now over 400K, so there has been some attention paid in the last two hours, FINALLY. So frustrating that the technical trade from yesterday, looking for a break down to 120-21+ in TYM never even came close, but this morning we put in a 120-20 on that last break. Go figure. So for choice today in TYM, we are looking for a trade down to 122-14+/15 to get long. There is minor support here at 120-20/19+, but that should give way if stocks continue their march higher. Should not get through 122-26+ rest of day (where we broke down, overnight high is up at 122-30+). Support beyond the above levels comes in at 122-08 and 122-01+. Resistance above 122-30+ comes in at 123-03+, 123-10+ (and then watch out!). This demand for spread product and lack of any real thematic Japanese selling for year end (way behind pace of a normal year, way behind) make it tough to buy vol given the conclusions are tighter spreads (buying product) and flatter curves eventually (money comes back in early April). But don’t want to sell vol, even with your money. If anything, would cover shorts but that’s about it on the conditional front.

Enough…time for me to order some pasta in honor of St. Joseph’s Day,