some retracement of move since last week…or something bigger afoot?? (Tuesday)

Global markets spent the night retracing some of last week’s large risk on moves, with Treasuries leading a small risk off/profit taking move across global assets ahead of the US open. Volumes are actually okay, news has been quiet, and flows have been rather orderly thus far. As of 8:30 AM ET, Treasuries are 1-6 bps lower in yield led by the 20y sector, while US equity index futures trade roughly 1% lower ahead of the cash open.

Treasuries saw better Japanese buying from the outset, with Japanese bank an early buyer of TY contracts and then cash 10s. Japanese real money then picked up the baton, lifting US 10s and mortgages, along with a social smattering of US 30s. The new player today was Japanese lifer buying of mortgages instead of US long end, joining what is getting to be a slightly crowded trade. Maybe that’s why Asian central banks skipped spread product today and instead focused on lifting 2s, 5s, 10s, and a few 30s. Levered accounts were better axed to sell TY and US contracts on the bull flattening rally, beginning their sales slightly after Tokyo lunch. Treasuries caught a late but small bid on news reports that several Chinese fighter planes had overflown Taiwanese airspace.

The large seller of Treasuries that we had seen last week in Tokyo afternoon and early European hours did not show up in force today (look at CNY and USD), instead selling a relative handful of 10s shortly before European open that took US fixed income off its highs, but at nowhere near their sales last week and Sunday night. Whether this is a function of the trade or as some might argue a repricing after the Chinese violation of Taiwan airspace is probably not as relevant as figuring out whether the sales over the last three sessions were about raising some cash or a structural change in investment policy on the mainland. We’ll see. But the selling was easily absorbed on the European open as London real money account was aggressive buyer of US 10s around the same time that there was deal-related receiving in USD 5y and 10y swaps. Soft German trade data (-24% in April vs -15.6% expected) added a bit of risk off, with European insurer lifting US 30s and European real money account adding 10s. RV was very small seller of 10s outright and against 5s, but repo seems to show that they already have a pretty solid short for today’s reopening (and it has taken on a bit of water since yesterday). Treasuries have given back part of their gains since the US arrived with better selling of 5s by macro account, seller of 5s against gilts by hedge fund, and US portfolio paying in USD 10y and 20y swaps.

Asia saw an interesting aggressive flow from the outset, with heavy receiving in JPY 20y, 30y, and 40y swaps that helped the JPY long end massively outperform overnight. Long end swaps there rallied over 7 bps outright and 4 bps on the curve. Looks like the flow was by foreign real money accounts, as LCH/JSCC basis collapsed on the flow. AOFM 4y tap went well, helping to bid rates in Australia and New Zealand. JGB yields closed 5 bps lower in 20-40y, 2 bps lower in 10s and only marginally lower in front end, while AUD 10s rallied 4.5 bps and Kiwi yields rallied 5 bps as all major curves flattened. Asian stocks were mixed, NIKKEI down .4%, Hang Seng (+1.1%) and ASX (+2.4%) leading in the win column.

Europe saw early real money buying of gilts (same buyer as Ts) but better dealer selling of bunds and bobls for concession ahead of supply. The weakness faded on the soft German trade data and then was gone after the Dutch 10y auction found extremely good demand and aggressive bidding. German 7y was softer than expected, with higher tail and lower bid to cover. Offsetting this was growing book for Ireland’s 10y and Spain’s 20y syndications. As session wore on, there was better hedge fund covering in buxl, German 10y cash, and some unwinds in EUR 5s30s steepeners on the swap curve. Peripherals trade slightly wider on the general risk off/covering theme. European equities trade slightly defensive, down 1.5% to 2% largely across the board.

Today’s data calendar is a nonevent, with JOLTS and wholesale inventories/trade at 10 AM. After that it’s about Treasury’s reopening of $29BN in 10y notes at 1 PM ET and then preparing for tomorrow’s FOMC announcement and then Thursday’s $19BN in reopened 30y bonds.

Well, so far, you would have to call this a retracement of last week’s bear steepening. You are within striking distance of Friday’s high in TY contract, stopped 1 bps away from Friday’s low yield level (.797%) in cash 10s, already took out Friday’s high in US classic (174-15) overnight, and have bested Friday’s low yield in cash 30s (1.6%, currently trading 1.59%). That said, you still have not hit bigger resistance points in both classic and TY contracts so let’s not get ahead of ourselves. For now, let’s call this retracement, especially given that open interest was a solid gain for Treasury futures on Friday and preliminary data shows most contracts saw drop in open interest on yesterday’s bull flattening bounce. Guilty until proven otherwise.

For choice today, call the range in TYU at 138-03+ to 137-15+, after an overnight range of 137-27+ to 137-10+. Support comes in at the 137-15+/15 level, 137-07, 137-05+, 137-02, 136-28, 136-22, 136-17; resistance comes in at 137-30+/31, 138-01+, the aforementioned 138-03+, 138-08+, 138-12, 138-15/16+. Think you need to see how it trades here, no reason to get jumpy either way as its better to wait for a clearer signal. Positioning seemed cleaner but the jump in open interest the last two days smells as it does not appear we saw any more long capitulation Friday, and the bounce sure seems like profit taking from the way the numbers read this morning. But to have neutralized Friday’s price action already today? Hmmm. I am quietly bullish (gee, shocker) on rates, but sitting on the powder for now. Of course, this is also the clown who can’t fathom risk at these levels, so what do I possibly know? And think the 10y should go okay to well at this point given the reaction to supply in rest of world and general appetite for Treasuries we saw from the investor community we are seeing since Thursday night.

Good luck and stay well out there,