shorts are leery of the month end extension trade in US and Japan… (Tuesday)

Markets have traded in a contained range, focused on NAFTA, China, new highs in equities, and this week’s end-of-month Treasury supply. Treasuries have traded 1-1.5 bps either side of flat, with volumes greatly exaggerated by quarterly rolls which must be wrapped up by Friday. As of 8 AM ET, Treasuries were flat to .5 bps higher in yield in the long end with US equity index futures small better.

The early Asian session saw two-way flow in 10y Treasuries, with Japanese bank buying of 10s being offset by better CTA and hedge fund selling in that sector that eventually saw 10s lead the way lower into the Tokyo lunch break. Credit desks in Asia were better sellers of 30s throughout the early part of the Asian session before some hedge fund receiving in 10s, along with Japanese real money receiving in 30s for month end helped to bring Treasuries back toward unchanged into the European open. Asian real money bought 30s outright on the hand off to Europe for extensions that actually took Treasuries positive on the session for a bit. Locally, Aussie 10s opened 3 bps higher in yield after yesterday’s back up in Treasuries, then proceeded to claw back some of the losses amid month end buying by real money accounts. In Japan, the curve bear steepened slightly on a weak results for the BoJ 15+ year liquidity auctions, as accounts want more in the 10y bucket. There was better paying in JPY 10y and 20y swaps early in the session but late trade was dominated by real money extensions, a reminder that JGBs extend a healthy .19 years this month. Asian stocks were generally small firmer after yesterday’s record closes in US indices, but Chinese shares closed small negative on mixed trade comments from US and China.

The European trade was a sideways affair for core bond markets, after UK repriced at higher yields post yesterday’s bank holiday and the backup in global rates on Monday. Flows were light, with the exception of an axed payer in USD 4y and 5y swaps shortly after the London open, a macro seller of US 10s to buy bunds, some good buying of BTPs (as of yet unexplained) while rest of peripherals traded under minor pressure. Once you got through the early morning in Europe, focus turned more toward real money and asset manager buying in US 10s and 30s, along with buxl and long-dated gilts, all with idea of matching month end extensions (large in US, smaller in German and EU, and basically flat in UK after last few months of large extensions there). There was some paying in US 2s just before NY walked in, with better RV selling of 5s since NY arrived but shorts watching nervously for more month end extensions. Some deal related paying in USD 30s since 7 AM ET has backed bonds down on the curve. European equities trade firmer with the exception of Spain and Italy for now.

Today’s calendar includes already released trade balance numbers (in line), Housing data at 9 AM ET, with Richmond Fed and Consumer Confidence the highlight of the day at 10 AM ET. There are no scheduled appearances or events today, although the market will be watching for any conversations/tweets/statements between the US and Canada on NAFTA. At 1 PM ET, Treasury will conduct the second of four auctions this week, selling $37BN of new 5y notes.

Well, nice quiet market yesterday allowed us to back up a bit more than expected; that was quite the pleasant supply. Thought here is they have reason to be nervous. For choice today, call the range in TYU at 120-19 to 120-07. Risk today is a break down through 120-07 early today; any break through there should be bought aggressively down to 119-31, at which point there is something bigger going on that someone forgot to tell me about. Further support comes in at 120-03, 119-31, 119-27, 119-24, 119-20; resistance comes in at 120-14, the aforementioned 120-19, 120-25, 121-01, 121-04. The bid to volatility yesterday, sneaky as it was in a curve flattener, all-time highs in stocks, quiet day in general was a warning sign against complacency. It wasn’t a big bid, but an early offer was reversed quite quickly. I would leave vol alone for the next couple of days, assuming you have some on, but would look to add some 5s after the auction today.

Have a good Tuesday,