theme ahead of Powell: position squaring and deal pricing (Tuesday)

With Japan’s return from a holiday and market’s focus on Powell testimony, the overnight session saw better volume and activity dominated by position cleaning up, despite lacking any real directional axe. As of 8 AM ET, Treasury yields are flat to .5 bps lower on the session in a minor flattener, while US equity futures are slightly lower ahead of the cash open.

The Asian session was dominated by position squaring and digesting Australia’s A$3.6 BN 2041 issuance. With no real data in Asia and RBA minutes of little consequence, better selling in US 10s and 30s by banks weighed on Treasuries until US rates put in their low for the night just as the Aussie deal priced, then recovering in the 6 hours since then. Aussie rates were 2-3 bps higher ahead of the 2041 issuance. Japanese banks were better sellers of US 5s and 10s, while Japanese real money sold 5s again but this time were seen buying cheaper 30s as well. Asian bank sold 5s after the Tokyo lunch. Swaps were a bit more active, with good two-way volume in 5y5y, while macro accounts unwound flatteners (ahead of Powell), receiving in USD 2s10s and 5s10s after the Tokyo lunch and well into the beginning of the European session. JGBs traded sideways with attention focused on a Jiji article that discussed BoJ view of changing buyback policy. As for equities in Asia, NIKKEI was up .5% aided by softer yen, while rest of Asian bourses wer slightly lower, hurt by US tech weakness from late Monday (AMZN and NFLX), down between .5% and 1%.

Once the Aussie 2041 deal was out of the way, Treasuries were free to pare early weakness, spending the European session clawing their way back toward unchanged. The European session was quieter with focus on German schatz supply, financial supply (Citi issuing in in EUR [8NC7y], Sumitomo, possibly BoA and GS), and continued unwind of BTP/Bund wideners. The schatz auction went well, as expected given its smaller size and relative safe status, while long end of European curve was better bid as the session wore on. BTPs are now trading over 6 bps tighter to bunds, continuing the trend from yesterday, as it appears more profit-taking than thematic. Rest of peripherals are in line with bunds, while equities struggle slightly on the hangover from yesterday’s tech weakness in the US, as European bourses and US futures trade marginally softer. Flows include some early selling in bunds to build supply concessions, buying of 10s to sell bunds by RV account, European real money buying of 10s and receiving in USD 10y swaps, macro account paying in USD 2y swaps after a bit more unwinding of 2s5s flatteners. European real money lifted gilts while deal-related buying was seen in buxl and bunds. On the whole though, volumes in Europe were much quieter than in Asia.

Today’s big event is Powell’s semiannual testimony before the Senate at 10:00 AM ET, followed by normal Q&A at roughly 10:30. With the Fed’s semiannual report to Congress released Friday, a road map for the Chairman’s prepared remarks is out there, while many people are comparing his comments from Sintra with the Fed release from Friday. Besides Powell, we will also get IP/CU at 9:15, NAHB at 10:00, and TIC data at 4 PM ET. Esther George speaks at 8 PM ET tonight on the economic outlook, so we’ll digest her views tomorrow.

Got a pretty nice pullback yesterday amid anemic volume, with some follow-through overnight that has largely been reversed as we now sit in the middle of yesterday’s range. Much of yesterday’s pressure was financial issuance related amid lighter volumes. With a good deal of that out of the way, markets trade better. Simple enough, before we add a dash of Powell. Technically, the market is relatively well-balanced; if anything, market trades a tad long here on a short-term basis, although structural positioning remains far too short. Treasuries remain within this crazy tight range, clearly coiling but not sending signals that a break out is imminent. Think early risk today is for short-covering but then think that Powell will do his best to highlight strength and Fed accommodation in an effort to underpin credit/risk. If we can avoid damage on the upside early, could finally clean out some weak longs later. For choice today in TYU, call the range 120-10+ to 119-29 (one of these days we HAVE to print that level!!!). If we take out 120-10+ early today, it could get ugly, with levels on the upside not that strong at 120-12, 120-15+, and 120-22 before we finally hit legitimate resistance at 120-26+ and 121-02. If we get the green light for risk from Powell, then maybe we can do some work on these weak short-term positions and trade down to 119-24+, 119-22+, 119-19 or (hold my breath) even 119-13. Still see no reason to play anything conditionally in a world that is too cheap to short but not attractive given breakevens.

Good luck out there today….