Risk off has become the theme since mid-morning in Europe as press reports indicate that Italy plans to present a budget that includes a deficit amounting to 2.4% of GDP, a figure that is at least .4% higher than the EU had indicated would be acceptable. The reaction has not been good, as risk has taken cover on this last day of the quarter. Treasuries are 2-2.5 bps lower in yield, led by the belly, while equity futures are marginally lower ahead of the cash open but threatening to break lower.

Gee, nothing to get Treasuries looking good like a little month end buying (volume concentrated in long end cash, US classic, and WN) during Asia, as long end well out-paced other sectors of the curve and was 2.5x average volume as Asian real money, including Japan, were far better buyers for month end. Even with JGBs offered early in the session on stories that the BoJ was prepared to further trim purchase program, pent up demand for Treasuries flowed like a river.

Then we got to Europe, or I should say, Italian soap operas. As budget nervousness and the usual Italian threats boiled up, Italian bank stocks led a turn down, Italian yields jumped, and risk took to hiding. Some Italian bank stocks reached volatility auction levels ( read: circuit breakers) just before NY walked through the door, as BTP 10y yields jumped 35 bps higher on the day and were as much as 43 bps wider to bunds just after NY arrived. Real money has again shown decent appetite for long end mid-morning in Europe, but the real bid has been bank and dealer buying of 10s to try and stay ahead of Italy, RV buying of 5s and 7s against BTPs, central bank buying of 7s. Macro accounts have been buyers of US and German 2s. Have seen good buying of gamma in bunds since mid-morning in Europe, mostly calls outright and delta hedged, along with some aggressive lifts in schatz since NY arrived.

Right now, it’s about how Tria extricates himself from this mess, if he can even survive, and the loss of credibility for Italy (like they really have any left?). The budget is due in days, with an EU response around the 15th. Going to need to restart the China or “Trump plan” talk again to buoy Italy until a new scam can be invented, like we did in August…. Don’t forget extensions on this last day of the quarter (+06 years for Ts, +.11 for agencies, +.08 for credit, +.07 for MBS) for the US along with talk of large rebalancing out of stocks into FI (I am so tired of hearing that story every month). Good luck out there today…..

Taking a back seat will be data today, including personal income/consumption at 8:30 AM ET, Chicago PMI at 9:45 AM, and Michigan sentiment at 10 AM. Barkin speaks at 8:30 AM ET, followed by Williams at 4:45 PM ET. More importantly, we’ll be watching the Ryder Cup….

Have a great weekend,

mjc