should be a boring summer set up day, but keep an eye on JPY…. (Tuesday)

It has been a quiet night for the markets in general, small risk on giving way to small risk off during the London morning, driven more by China/US rehashing and some unofficial Chinese sanction threats toward France, India (that’s new) and US didn’t exactly help risk. As of 8:45 AM ET, Treasuries are bull flattening with long end 4 bps better in yield while front end is barely lower; US equity index futures are trading small lower just ahead of the cash open in minor risk off move.

Flows were quiet, with not even 200K TY contracts traded by 8 AM ET. There was some early Asian bank paying in USD 5y swaps along with macro selling of US 10s as JPY traded at 106.20 around Tokyo lunch. Treasuries started to bounce after RBA left rates unchanged but indicated they would resume QE purchases for the first time in three months (last purchase was 06 May). There was an uptick in volume to sell in the last two whites and first two reds (EDH1 through EDZ1) before London open that dented the early steepening bent, but it largely reversed as back end held firm and helped reverse the pressure on 1y. Treasuries found some support into the European open on central bank buying of 10s, 20s, and mortgages, albeit in smaller sizes, and there was some early European real money buying of 2s and 5s just before London kicked off. There was more central bank activity in London today than yesterday, buyers of US 30s and more mortgages, along with some deal-related receiving in USD 10y swaps. Hedge fund selling of 20s and paying in USD 30y swaps backed rates up slightly after NY arrived, bit it remains a very quiet session before a busy (he says hoping) rest of the week.

JGB 10y auction was mixed with an average tail and softer bid to cover, but the record size being taken down without incident caused JGBs to rally into their close. Aussie front end outperformed after the RBA announcement on resuming QE, with 3s10s curve there steepening 1.75 bps. JGB 10y yields ended down 1 bps, Aussie 10y yields were up 1.5 bps, and Kiwi 10y yields were up .25 bps. Asian stocks were uniformly higher after yesterday’s US performance, but Chinese shares lagging and Shenzhen actually small lower on the Chinese threats.

European session has been dreadfully quiet after an early flurry. There was good buying of some 20K schatz early in the session, pushing swap spreads wider, setting the tone for a risk off session, with rest of curve kicking in shortly thereafter. Lot of talk about growing interest to get long Spain and Italy by hedge funds has helped those countries lead tightening to bunds. Austrian 4y and 10y supply went fairly well, with smaller tails and mixed bidding in 4s but strong demand for 10s. Gilt supply and a very sloppy 21y year TAP to be specific have caused gilts to underperform US and EZ. The 10/41 TAP saw a tail of 13.9 bps (avg of 6.6) and a bid to cover of 1.95 (avg of 2.17 and last of 2.24). European stocks look to be following US index futures, trading little changed, either side of flat.

Today’s calendar brings us factory orders and durable goods at 10 AM ET. And that is about it kids. We’ll have to wait for tomorrow’s refunding announcement and ADP reports for some action, so you enjoy what could be a long day.

Market is interesting today, that’s for sure. Just not sure it HAS to move before tomorrow. Said yesterday that if you got back above 140-01+, you were taking 140-06 high from Friday and likely headed to 140-17. And look at that, trading 140-06 right now.

But, we did trade down yesterday and we have to be objective, meaning against that backdrop, we did see open interest tick up across the board: TU +22K, FV up 20K, TY up 16K, US up 27K. Lower prices, higher open interest on Monday after Friday’s higher prices, lower open interest? That’s not exactly confirmation of a bull move. On the other hand, over $18BN in corporate supply was EASILY digested by this summer-thinned market yesterday, without as much as a hint of indigestion. Market is coiling but continues to generate mixed signals.

Going to try and keep it simple here. More so than even back in March, Treasury yields are tied to JPY for now. 106.70 and 105.40 in JPY spot are the levels. Take out either and yields in long end will move in direct opposition to yen. So if you think we are headed for 104.00 test again in JPY, then hope you like a sub 50 bps 10y note and if we take out 104.00, well, sub-1% 30y bond is pretty cool too. On the flip side, take out 106.70 and we can start hoping for a .70% on 10s. And I don’t really think it matters what number you want to assign to Friday’s jobs report or tomorrow’s refunding announcement.

So for choice today in TYU, call the range at 140-09+ to 140-01+ (yes, don’t think much is going to happen unless JPY really starts moving), after overnight range of 140-07 to 139-30. You should not get through 140-01+ if you are going to test 140-17+; conversely, take out 140-09 and you are likely on a straight shot to 140-17+ because something is going on that wasn’t planned for today. Support below 140-01+ comes in at 139-26, 139-24+, 139-19+, 139-11+, 139-07; resistance comes in at the aforementioned objective of 140-09+, 140-17+, 140-21, 140-24+, 140-30.

Have a great Tuesday,