Markets have traded in a choppy range overnight, decent volume in most sectors, bouncing between risk on and some profit-taking in risk. After the ECB confirmed larger PEPP size (EUR 600BN increase) and length of programme for at least one more year, markets have turned slightly better to risk. As of 8:45 AM ET, Treasuries are bear steepening again, with front end anchored and back end 1-1.5 bps higher in yield, while US equity index futures trade marginally softer ahead of the cash open on some profit taking after a good week.
As for Treasuries, as expected, we saw Japanese buying from the outset, with real money account lifting 10s, after cash reopened in Tokyo slightly lower in price than 5 PM close but 1 bps lower in yield than 3 PM marks. Asian banks lifted 7s and 10s as well before Tokyo lunch, while Japanese lifer bought 10s. One of the problems was the lack of support in the very long end early in the session, which seemed to dissuade further buying in the second half of the Asian session. Only central bank buying in ultras, belly and mortgages kept Treasuries from backing up before London arrived. Very interesting as well that there was a huge offer at 138-12 in TYU contract every time we went -11+ bid. Very late in the Asian session saw better interest to buy USD spread product along with better paying in USD 5y and 10y swaps.
Treasuries then traded all the way down to unchanged on the lightest volume of the session into the European open, as hedge funds sold Treasuries to match softer open in bunds, apparently no one caring that Merkel’s deal with coalition had been announced AFTER Europe closed yesterday and would cause repricing on the bund open. There was also concession selling ahead of large supply out of France and Spain. Treasuries eventually found a bottom at unchanged from Wednesday’s settlement, with better RV buying of TY contracts against bunds. Some risk off talk of hedge funds selling eminis to buy TY and FV contracts, while old Williams comments from last week were rehashed and macro account lifted 2s and 3s on speculation that Fed would talk more about yield control next week. Whatever. The larger than expected increase in PEPP by ECB at 7:45 AM ET caused a bid to risk and quick selling of US contracts by fast money accounts.
Locally, Asian session was fairly quiet after everything repriced post yesterday’s Treasury sell off. Australian 10y yields broke through 1% after yesterday’s US sell-off, surprisingly finding fewer buyers than many expected. A soft JGB 30y, sporting its lowest bid to cover (2.84:1) in four years got everyone’s attention as the lack of support broke a nice run of solid MoF auctions. JGB yields ended 1.5 bps higher in 10s, 2.5 bps higher in 30s; Aussie 10s closed 4 bps higher (1.01%), while New Zealand rates closed 2.5 bps higher in yield. Steepening without support is not a good look for Asian fixed income (ditto US!!!). As for equities in Asia, they didn’t trade as firm as one would expect after yesterday’s US rally, with most bourses closing within .5% of unchanged.
Europe was all about supply and the ECB. Early dealer selling in bobl and bund for French and Spanish supply also saw better tactical sales out of macro account and RV sales on bounces in buxl. There was large real money paying in EUR 10y swaps as well. The French auctions saw good bid for current 10y tap, but only mediocre interest in the new 10y, while 32y issuance did not go particularly well. Spanish auctions saw decent results for 4s, 5s, and 15s, with much weaker demand for 3s and 10s. Net of net, bounced after the supply was out of the way, but came off again after the ECB announcement. UK saw gilts trade slightly firmer, with this week’s supply out of the way, but then come off after slightly disappointing buyback in an otherwise quiet session there.
We have largely ignored the 8:30 data, as we will set our sights on tomorrow’s NFP report. The claims numbers are holding stubbornly higher after we latched onto yesterday’s surprisingly upbeat ADP report. I think we got sober real quick today with this continuing claims number. As we all know, but many have forgotten, the first PPP checks hit their two-month thresholds on Monday, and without another backstop, layoffs look to be coming for many businesses. End of the day, may be much better than we have feared for last three months, but we aren’t out of the woods yet, heck not even sure I can see anything but tree bark right now!
Okay, pretty impressive yesterday. CTA stop out story looks to have been legit, given move and the healthy drop in open interest for TY and FV contracts. Only the US classic and the Ultra 10s did not see drop in open interest, the former because it took the day off (intermediates led the sell off yesterday) and the latter because….well because it’s the ultra 10 and is only used for hedging for the moment, not a mature vehicle. Reality is there is another axed seller out there, and it’s a big one. Clearly coming out of Asia, just look at Asian currencies. Have a few people talking about it, just not sure we should be spreading rumors about discord (there, do I need to draw you a map?). We’ll see. So until we get rid of a few more bad positions and actually get some religion for the shorts, will have to stay mildly bearish, but looking for a spot to buy. And we will have to see Japan start buying the very long end here. That is missing for sure. Could be as aggressive as a new low in futures contracts from yesterday, or wait until closer to 0.83% in 10s, but either way, patient. For choice today in TYU, call the range at 138-12 to 137-30+, after an overnight range of 138-12 to 138-04+. This will be hard. Will have a test of 138-12 in next hour; if that massive offer is still there and we turn, fine; however, take out 138-12 and you will likely be headed to 138-24, which will make things really dicey into tomorrow. Support below the market in TYU comes in at 138-01+, the 137-30+ level, 137-21, 131-11, 136-30. Resistance comes in at the 138-12 level, 138-16, 138-21, 138-24, 138-27+ (getting crowded there!).
All right, have a good day and be careful out there,
mjc