tale of two risk trades overnight as market awaits busy rest of week (Tuesday)

A small risk off bid during Asia flipped to risk on for a bit shortly after the European session opened, as market largely bides its time ahead of the big events the rest of this week. As of 8:15 AM ET, Treasury curve is mixed, yields .4-1.0 bps higher, belly leading the sell off, while US equity index futures are marginally lower ahead of cash open.

The Asian session opened fairly quiet with small risk off sentiment, Asian stocks under minor pressure on the back of continued geopolitical concerns in Hong Kong and Iran (nothing new, just the usual). Treasuries traded flat to their 3 PM marks, slightly better than the 5 PM levels. There was some very small Japanese real money buying of 30s, offset by RV selling, while Asian banks were lighter buyers than normal in US 5s. Central banks bought 2s and sold 3s, the latter to see new issuance later today, but nothing of great intensity. Hedge funds were again seen adding flatteners on the swap curve, continuing to add 5s30s flatteners, while RV account was seen adding 2s10s steepeners. Locally, a soft JGB 5y auction (tail and soft bid to cover) kept pressure on JPY rates, but better domestic real money and bank demand saw Aussie rates underpinned, as yields in JGBs were up .5-1.0 bps while Aussie 10s were .3 bps lower in yield. China and commodity-based economies saw equities under pressure, with China down less than 1% but Australia leading the loss column at down 1.65%. Treasuries flat-lined at mixed to their 3 PM marks from Tokyo lunch until the European open.

Fixed income in Europe and the US flat-lined through the open in Europe, but shortly thereafter stories about Japan and South Korea meeting to resolve their own trade dispute helped brighten the outlook for risk, as Japanese stocks turned positive and KRW turned up. Volume was light, but macro account was a good seller of TYU and USU contracts, with CTAs then selling TYU and FVU through yesterday’s lows (127-10+ and 117-18+ respectively). More interest was seen to add 5s30s flatteners, as 5s have underperformed on the curve for three sessions now. RV accounts sporadically sold 30s ahead of supply, outright, on curve against cheap 5s, and also against UK gilts. There was a block buyer of 20K (x 40K) TYU 125.5/126.5 put ratios for 5/64 that further pressured Treasuries just after 5 AM ET. Bunds and gilts see bear steepening pressure as large sovereign and SSA issuance calendars for this week weigh on long ends. Best sellers of bunds were macro accounts, while best sellers of buxl have been dealers and RV accounts. Dutch sale of 10y DSL went fine, while German sales in 4y and 11y linkers found decent demand. EFSF new 10y paper weighed on bunds right through the arrival of NY, with some short covering materializing ahead of the Chicago pit open. European equity index futures trade lower into the afternoon session as risk is not uniformly chipper.

Today in the US, data will remain secondary with only JOLTs left on the calendar, at 10 AM ET. However, we do get comments from Powell at 8:45 AM ET (opening remarks on stress tests, doubt he strays from that topic ahead of his House testimony tomorrow), Bullard (10:10 AM ET) and Bostic (2:20 PM ET) at Washington University, while Quarles will follow Powell at 2 PM ET to give his views on stress tests. Most important event of the day will be Treasury’s issuance of $38BN in new 3y paper to be auction at 1 PM ET to kick off this week’s supply.

Okay, vols cheapened only slightly yesterday, but hoping the flattening today and the continued unwind of weak longs in TUU and FVU (open interest off the last few days as weak longs get stopped out) gets vol to cheapen and let’s us get this conditional call on in FV space. In case you missed yesterday, think there is value in adding FVQ (expiry 7/26, 17 days) 116.75 puts delta hedged, synthetically adding a call structure. Right now, the premium is too high (4/64 against 117-16.25) but a small uptick in futures and some further softening of vol (2.5/64s against 117-22, with a 10% delta would be a great level) may give one a chance here. As for choice rest of today in TYU, let’s call the range 127-15 to 126-29+, after market has traded 127-16 to 127-05+ range thus far today. The market should stay quiet, leaving the “bears” in control for now. TYU satisfied its outside reversal week lower by trading 127-05+ overnight; US classic however still needs another half point lower here, requiring a trade below 154-15 to satisfy. Thus think there is more downside, and market should look to get that done before 30y supply on Thursday. As for rest of support in TYU, watch 127-03+, the aforementioned 126-29+, 126-24+, 126-22+/21+; resistance comes in at 127-10, the aforementioned 127-15, 127-23/23+ (key level), 127-29+.

All right, have a good day out there….