Risk on continues to be the theme this week, or at least the “risk shorts” continue to feel the pain. Comments by Navarro to FOX News just before Tokyo lunch took a quick 60 handles out of eminis and 4 bps out of 10y yields, only to completely reverse course when Navarro released a clarification that his comments were taken “wildly out of context.” Just not sure how “over” is taken out of context, but I digress. So now we are back to full risk on, with strong PMIs in Asia and Europe further supporting the risk on move. As of 8:30 AM ET, Treasuries are .5 to 3.5 bps higher in yield in a bear steepening, while US equity index futures are just better than 1% higher ahead of the cash open.
Treasuries opened softer on a higher open in US equity index futures, with some small two-way flow in UST 5s (banks selling, macro account buying). The Navarro comment in answer to a question on the status of Chinese trade negotiations (“It’s over. Yes.”) caused a 60 handle drop in eminis at 9 PM ET and a corresponding 4 bps drop in 10y yields. Volumes exploded but mostly in futures space, with aggressive fast money buying of FV and TY contracts. That would not end very well, as President Trump (or his handlers) quickly tweeted “China Trade Deal is fully intact” and Navarro issue a statement that his comments were “taken wildly out of context” (whatever that means). Some of the fast money flipped out of their losers while cash was quieter and swaps apparently barely traded, as it was just too choppy. There was Asian bank selling of 7s and small paying in 3s, while central bank lifted a handful of 10s before London open.
Swaps traded a little more in London, but really market got very quiet as per pattern of late. There was a 5s30s steepener in USD swaps done by macro account, with hedge fund paying in USD 10s and dealer paying in USD 7s. Some RV shorts were set in 2s and 5s, with a 2s10s flattener also being plied by a hedge fund ahead of today’s record 2y auction. Strong PMI reports in Europe added to the risk sentiment, with a buyer of 10K TYU 137/138 put spreads for 17- up to 18/64s. There was hedge fund selling of TY and US contracts on the PMI numbers but USD activity really quieted down once Europe settled into the seat. There was some dealer selling of 7s as NY arrived, but better short covering by CTAs on the new low in TY.
Australian PMI jumped to its best level since December of 2019, printing 52.6 vs a 28.1 in May, while Japan PMI jumped to 37.9 versus 27.8 last month. Better selling in AUD rates to build in larger concession for tomorrow’s 2029 TAP by AOFM pressure Aussie and Kiwi rates, while Japan actually saw better foreign interest to buy JGB 5s. JGB rates were flat in 10y space, with small steepener bent, while Aussie and Kiwi 10s were 3.5 bps higher in steepener. Asian stocks plowed ahead, closing up between .5% and 1.5%, led by the Hang Seng.
Strong PMIs for France (52.1 vs 46.0) and Germany (44.6 vs 42.5), along with better service PMIs as well kept risk sentiment strong, with concession building for sovereign supply weighing on rates as well. Dutch 20y auction went fine, with slight overbidding, but UK and German issuance struggled. The UK 6y and 10y, along with the German schatz, all had lower than average tails, but all struggled to find buyers, which is a bit of a change from recently. Good macro selling of buxl and 20y gilts lead bear steepening in Europe. Better RV interest to pay in GBP 5y swaps and German 10y swaps, along with steepener interest in German cash for 2s10s. Peripherals tightening roughly a bp tighter to core on the risk move while European equities trade 1.2% to 2% better on the session.
Today in the US, we get PMI at 9:45 AM ET with new home sales and Richmond Fed at 10 AM. Bullard will have an online discussion on the economy and monetary policy at 1 PM ET, right at the same time Treasury kicks off a record issuance week for 2s, 5s, and 7s, with $46BN 2y notes for an appetizer. Usually 2y note is a nonevent, but given the larger sizes in 5s and 7s as well this week, we will have to watch for any type of protests by the investor community.
The one thing last night highlighted is exactly what we have seen for the last three weeks: the “risk” shorts are large and getting squeezed hard. The Navarro comments were reversed way too quickly to have been dismissed out of hand. Two months ago, we would have halved the move (“where there’s smoke, there’s fire” mentality), but we actually outperformed since then, using the Navarro comments as chance to trap more shorts. I don’t think the current state of equities and fixed income is any more complicated than that. Specs are short equities (see COT reports) and rest of world is underinvested (i.e. Structurally short), with the opposite being the case in fixed income. We could easily see 3327 in ESU0 emini futures to fill a gap from back on February 21, as crazy as that seems.
For choice today in TYU, let’s call the range at 138-23+ to 138-10, after an overnight range of 138-29 to 138-16+. If you can take out 138-10, you may accelerate enough to test .81% (roughly 137-26 in TYU) in cash 10s which would really make this interesting. Support in TYU today comes in at 138-16, 138-10, 138-01+, 137-30+, 137-26 (.81% in cash 10s is the actual level), 137-21. Resistance comes in at 138-23+, 138-29, 139-00, 139-06+, 139-09. Have a great Balloon Tuesday.
Be safe out there,
mjc