short update before ADP: very good volume in tamer risk on trade….

Risk on was the theme overnight, but not aggressive risk taking, more like adjusting to cover short risk or add risk on the margins. As of 8 AM ET, Treasuries were 3.5 bps steeper in 2s30s, with 2s some 3 bps lower in yield and 30s about .5 bp higher, while equity futures point to a higher open, currently .5% better on the session.

The belly of the curve led Treasuries higher early in Asia after China, Japan, and Australia all managed to print softer than expected service PMIs, but still managed to stay above 50 (52.7, 51.7, and 51.5 respectively). Talk of a rate cut for Japan (not until 2020) helped bid Treasuries as well, with Trump talk of “always a chance” for military action in Iran and “no bluff” on the tariff/immigration deal with Mexico providing a further boost to Treasuries into the European open. Europe reversed the soft PMI trend of Asia, as Spain and Italy beat expectations on service PMIs, Germany was revised up, and UK beat service PMI estimate as well. Some are attributing the move back to unchanged in Treasuries on the data, but it seems more technical and position-driven than anything else. With ADP at 8:15 AM ET, we have quieted down appreciably since NY arrived.

As for flows, it is important to note that open interest across the Treasury and Eurodollar curves dropped appreciably yesterday, effectively confirming that the aggressive real money selling we saw in 10s and 30s for Treasuries was liquidation; at the same time, Asian real money added to their sales from yesterday, selling USU classic contracts during Asia, selling cash 30s and paying in USD 30y swaps during the London session. We are told this is a reallocation into risk assets, and one could see the inverse moves taking place between the two sectors. Belly led the move higher in Asia against this backdrop, with 2s and 3s being jettisoned by Japanese banks and levered accounts after Tokyo lunch. There was some small RV activity to buy JGB 10s (at their lowest yields in 3 years) on the “rate cut talk” against US 10s, as RV sees JGB 10s cheap to curve and cheap to Treasuries. Aussie 10s rallied another 1.5 bps as well on good domestic bank buying of 10s outright and on the curve against 3s. Asian banks were again small buyers of US 5s, but better receivers in USD 5y swaps. A block curve trade in TU/FV at 9:04 PM ET saw $498K of DV01 done on 2s5s flatteners that helped 5s further lead the way. Once we backed up and risk got a steadier bid, activity dried up a bit ahead of a large slate of issuance tomorrow along with the ECB meeting. European real money sold US 30s outright and against risk on the PMI data, while macro accounts continued to sell 2s, and add conditional bears via selling Eurodollar calls outright and adding puts on midcurves.

Today’s US calendar brings us ADP at 8:15 AM ET, along with Non-manufacturing PMI at 10 AM; Markit PMIs will hit at 9:45, and the Fed Beige Book will be released after I leave for golf, at 2 PM ET. Clarida speaks at 9:45 AM ET, Bowman testifies before the Senate Banking Panel at 10 AM, and Bostic speaks on housing at 11 AM. Keep an eye out for drive-by comments as Fed members prepare for the start to blackout period this Friday.

Okay, try to keep this short. You have some risk on, some risk rotation, and some general liquidation at work in US fixed income. Market trades very skittish though, working hard to sell off and rallying very easily. You also have open interest declining on down days (not what a bear would want to see). Think this highlights that trading from the short side is very dangerous. It is right to lighten up on “risk off”, “long gamma”, long outright positions to book profits here, but it’s hard to run an outright short. Against that backdrop, for choice today, going to call the range at 127-06 to 126-21 in TYU9. Get above 127-06 and you have to deal with some upside resistance at 127-11+/12 (forget profit taking if we get above here, just buy the break), 127-19, 127-25, and 128-02. Support comes in at 126-27, the 126-21 level, 126-19+, 126-13, 126-09, 126-06.

Good luck this AM and stay dry….