Markets are biding time so far this morning ahead of US 10y supply and the minutes from last month’s FOMC meeting, with equities bid again and Treasuries lower. The start to this year has been an orderly risk-adding process thus far, as evidenced by equities, spread product, and commodity-linked currencies. As of 8:00 AM ET, Treasuries were 1-2 bps higher in yield, with the curve steepening since early in Asia, while equities are marginally firmer ahead of the cash open.
Early flow today saw fast money selling of 10s and US classic futures on strength in risk markets, only to see the Japanese buying overwhelm that sentiment. Talk that Trump now seeks some resolution on Chinese trade to support stocks underpinned risk markets. Flows out of Asia have been amazingly consistent this year, enough so that over the last few sessions, European macro accounts have begun fading the move on the handover from Asia to Europe. Again last night, Japanese real money was a better buyer of cash 10s and spread product; the buying has been consistent since January 2nd, larger last week and starting to lessen a bit each day this week. There was not as much interest in mortgage product today, but other spread product showed the willingness of the asset community in Japan to add risk in early ’19. Asian central bank continued it’s 2019 theme of selling front end (2s and 3s), which has been the case for five of the six sessions this year, the exception being Monday after Friday’s large back up. Interesting that today saw some of the same central banks lifting 5s just before the European open. Asian bank selling of 2s and 5s, Asian real money selling of 7s and 10s into the Japanese real money bid, and some Asian corporate receiving of USD 5y in swaps emerged around Tokyo lunch and continued through the European open. Soft Aussie building data helped bid Treasuries off their early lows as well, while Chinese retail auto sales are garnering some notice (first three month downturn in some two decades). Asian equities were all higher, paced by a 2.25% gain for the Hang Seng.
The European session saw much better hedge fund and macro selling of TYH, cash 10s, and USH contracts, exactly the same trade that generated good profits yesterday. A very large issuance calendar (SSA and corp) in Europe to start the year has kept a lid on UK and EU/German rates, giving RV ample opportunity to sell Treasuries. Bunds have bounced since the auction of the new 10y bund, which was well-attended but needed a large tail to get fully distributed, helping to drag Treasuries off their mid-morning European lows. Launch of Irish 10y deal (heavily oversubscribed) and anticipation of Portugal 10y (huge interest) are helping to support peripherals in the risk-on world in which we live currently. European stocks are up over 1% on the day as well, the greenback is under pressure, and Treasuries have stepped to new lows beset by lighter volume during the late European morning. There was some early selling in Eurodollar reds during the European morning, but some covering of overdone backup the last few sessions has actually seen some minor flattener unwinds in reds/greens and reds/blues in the last few hours.
That’s a fairly decent amount to digest, largely covering the first five sessions of the year. But the theme is money being put to work out of Japan has all been about buying risk duration (i.e., spread product), repricing of the end of December easing trade, and general positive risk sentiment across Asia, more concentrated in Japan for now. That seems about fair, as it appears the glass is not necessarily half empty, although it might not be quite full either, maybe something in between. We should have another 1-1.5% bounce in equity indices as a proxy for general risk (using SPX index, resistance comes in at 2600/2603, 26 points from Tuesday’s settle), with much larger resistance at 2710 (oh if only…). In rates, think you have a pretty important test of 2.82% in cash 10s coming up, which implies a test of 120-30 level in TYH9 (coincidentally resistance as the 12/18 high). The whole risk on thing will be officially blown up if we take out 2.6% again though, so trade with caution, which is why vol is holding in as well. For choice today, let’s call the range in TYH at 121-25+ to 121-11+. Resistance comes in at the overnight high of 121-24, the aforementioned 121-25+, 122-00, 122-07+, 122-16+; support comes in at 121-14, the above 121-11+/11, 121-03, 120-29+.
Today’s calendar is fairly light, with only FOMC minutes from the December meeting left for release at 2 PM ET. Bostic has already largely repeated his comments from the other day about the “slowing economy” (I refuse to comment), while Evans speaks now and Rosengren speaks at 11:30 AM ET. Of course the biggest event of the day will be Treasury’s issuance of $24BN in reopened 10y notes. First blush would be decent demand, but the release of FOMC minutes 60 minutes later makes this less of a slam dunk than otherwise would be the case given the interest in duration out of Japan to start the year. Oh well, early guess is it goes just fine….
Happy New Year again and have a great hump day….
mjc