Another day, and it is beginning to feel like Groundhog Day again… Today’s difference via the 42% drop in CLM0 (June crude now, not the recent May Crude focus) caught everyone’s attention mid-morning in London, hammering risk, as the last few days are clearly not a one-off move driven by liquidity. The problem in oil highlights much larger issues with restarting our global economy. As of 8:30 AM ET, Treasuries are 1.5 to 8 bps lower in yield amid another aggressive bull flattening, while US equity index futures are trading down 1.5 to 2% an hour before the cash open.
Things started off tame enough last night: US equity index futures bounced slightly, while a US real money account was seen selling 10s on the opening at 6 PM ET; we haven’t seen that flow in awhile. There was two-way flow in the long end, with Japanese lifer buying of 30s, but better RV selling of 30s outright and against USM classics (interesting). The flows out of Japan remain lighter than one would normally expect during the first month of the new fiscal year, as clearly the new working conditions are hampering comfort of Japanese accounts to participate. After Tokyo lunch, there was better real money receiving in USD 10y swaps, with hedge fund looking at receiving in 2y5y forward space, while Asian bank sold 5s. Stories that Kim Jung Un was gravely ill caused Treasuries to go bid and risk to seek momentary shelter. There was actually decent two-way flow after Tokyo lunch as the headlines from North Korea saw better flow before things quieted down into the European open.
Locally, JGB 20y issuance was sloppy, the .11 bps tail for the issue being the largest in almost three years; however, the events in North Korea and the general risk off underpinned JGBs after the auction as JGB 10s closed the session .5 bps lower in yield. RBA minutes indicated that the central bank was looking to further curtail purchases as conditions warranted, putting steepening pressure on the Aussie curve, with 10s closing 2.5 bps higher in yield by session’s end, while New Zealand saw a horribly quiet session that left Kiwi 10s flat to marginally higher in yields across the curve for the session. As for equities, major Asian bourses closed down between 1.5% and 2.5%.
Treasuries traded sideways from just before London arrived until mid-morning in Europe. At that time, they were dragged higher by bunds as word leaked out that senior French officials believed no decision would be made on further stimulus via the recovery fund before Thursday’s EU Leaders Summit. Greece (13 bps wider to bunds) and Italy (10 bps wider to bunds) continue to drive peripherals wider. A UK 5y gilt auction and a German schatz (2y) auction both met with good bidding and saw smaller than expected tails, while a UK 10/54 TAP tailed more than expected but did find deep bidding at the cheaper levels. There was deal-related selling in bunds and bobls early in the session, as well as RV selling in all three of the aforementioned tenors ahead of the supply, with most of the UK flow being against UK 5y in steepener. But the recovery fund story and the ensuing 42% drop in June WTI (CLM0) brought out a cascade of short covering by macro types in the belly of the curve, with bunds and bobls seeing the best buying buying.
As for Treasury flows, there was some hedge fund paying in USD 10y swaps shortly after the European open, but when crude plunged that paying turned to macro buying of FV contracts and cash 10s, along with RV receiving in USD 10y swaps. Central bank lifted 5s but did not buy mortgages as per usual. Flows dried up before NY arrived, as everyone seems to be getting a bit tired of this trade. There was buying of cash 10s by portfolio accounts, receiving in USD 7y swap and CTA buying of WN futures into the Chicago open.
The only data today will be existing home sales at 10 AM ET. The Fed will conduct it’s normal, reduced-size buybacks at 10:30 AM ET (20-30y sector, roughly $5BN) and at 11:20 AM ET (4.5-7y sector, roughly $11BN). Corporate issuance was amazingly light yesterday, with only $4BN in supply as three deals were pushed back to today. However, given the tumult in the risk markets, today’s early call for $8BN looks like even that low hurdle may be tough to clear unless risk stabilizes.
All right, for choice today in TYM, let’s call the range at 139-27 to 139-11, after a range thus far of 139-20 to 139-02+. This is a sneaky quiet bid and does not feel very good right now. As for support, below 139-11, watch 139-07, 138-30+, 138-22+, 138-15/15+, 138-11+/12+, 138-02. Resistance comes in at 139-27/27+ level, 140-02, 140-18, 140-24. It’s tough to do anything outside of the underlying in the markets that are this illiquid and the extremely light volume in Treasury futures just shows how bad things really are. I will try to be a bit more positive for Hump Day tomorrow….
Have a good, safe and healthy day out there,
mjc