Markets traded mixed until headlines out of China have caused a minor risk off adjustment since mid-morning in London. Chinese barbs at Trump and his negotiating style have resulted in a safety bid for gold and global fixed income, along with pressure on risk assets. As of 8:15 AM ET, Treasuries were 2-4.5 bps cheaper in a flattener while US equity index futures were down marginally ahead of the cash open.

The Asian session saw Treasuries come under early pressure on the back of US real money selling for a second consecutive session on the cash open, with better selling seen in 5s and 7s, while Japanese bank wasted little time paying in USD 10y swaps ahead of the BoJ announcement. Levered accounts aggressively sold front end of US curve in 2s and Eurodollars as the curve bear flattened before Tokyo lunch. The BoJ left rates unchanged as expected, but made clear that it was prepared to lower rates further if necessary; Kuroda made his usual comments about the long end (negative impact of low long-term rates) in his press conference, but was not as “hawkish” as market anticipated, much like Powell yesterday, as the BoJ chief highlighted a downward revision to BoJ forecasts for GDP and inflation now through 2021. JGBs were actually .75 to 1.5 bps lower in yield, led by the belly, with JGB 10s down 1 bp. Flows saw more real money interest to reduce duration of holdings, selling JGB 20s to buy 5s being a key theme. Aussie and Kiwi rates both trended marginally higher after analysts lowered likelihood of further cuts this year. Asian equities trade mixed, China under minor pressure again while rest of Asia traded slightly better.

As for USD flows during the Asian session, there was a large OTC 3m1y forward ATM straddle that traded for size (hearing $250MM size) along with a short January Eurodollar risk reversal (largely matches the expiry of the swaption) that was blocked to buy the call early at roughly the same time the swaption traded. The same Eurodollar structure traded throughout the night on the screen, but looked like there was a buyer of the cheap put mid-morning in London. The front end selling referenced earlier was also seen in swaps, with better flattener interest in USD 3s10s, 5s30s, and 10s30s swap flatteners by Asian real money accounts and RV types focused on the 10s30s flattener. The front end pressure abated before BoJ statement and focus turned better to buying by Asian central banks in 2y and 3y space. Around the same time, Japanese real money became more active in lifting US 7s and 10s, while also adding to their portfolio of MBS, more actively than in recent days. Japanese lifers bought 30s into and through the European open, while Asian banks paid in US 10y swaps. There was a chunky futures fly that traded just before London walked in: a seller of $485K in DV01 of the wings on a 2s5s7s (TU/FV/TY) fly. So yes, it was a busy night in Asia.

Then there is Europe, which started better bid on the Treasury buying just before the handover, while global fixed income then found better buying on reports that North Korea was firing missiles after stalled talks with the US (you can’t make this up). The move was minimal, but did support Treasuries. Soft French CPI then caused bunds to take a momentary lead in the bidding war, only to swing concerted risk off when a Bloomberg story claimed China panned negotiations with the US and specifically questioned the sincerity of President Trump {https://blinks.bloomberg.com/news/stories/Q08EK46JIJUY}. Risk took a minor header, while Treasuries rallied a quick 3 bps to their current levels. Flows in Europe saw better selling of US 5s and 7s by European real money accounts before the China story, along with macro selling of 3s outright and on the curve against 10s, more central bank buying of 2s, deal-related paying in USD 10y swaps, and more bank interest in adding 5s30s flatteners on the USD swap curve. Bunds saw better buying of buxl and RXA contracts ahead of resumption of ECB QE buying. Option interest in Europe was better axed to sell puts, as selling “higher forward rate protection” is clearly in vogue these days.

Today’s calendar includes PI/PC and weekly claims data at 8:30 AM ET, followed by Chicago PMI at 9:45 AM ET. There is bill supply, but no other supply and no Fed speakers until tomorrow. We will get month end, with Treasuries called to extend a modest .06 years, MBS at .06 years, Euro Treasuries at .12 years, and gilts without extension. That will be minor, minor support at best for market, but still worth noting.

Well, this is very interesting and getting very tangled. We couldn’t pull back nearly as much as we might have hoped yesterday, which was a bummer. We couldn’t even take out the bottom of value from Tuesday (129-04) or trade a good level (128-29), but boy it didn’t seem folks had gotten that short yet. The next big level on the upside is 130-13+ in TYZ, take that out and it gets legitimately ugly. Enough for now. For choice today in TYZ, let’s call the range at 130-05 to 129-22 for the rest of the day (overnight low is down at 129-17, should not see that again). Support in TYZ comes in at 129-26+, the aforementioned 129-22, 129-17/16+, 129-09+, 129-05/04; resistance comes in at 130-01+, the aforementioned 130-13+ (1.68% 10y equivalent), 130-21, 130-27+, 131-06+. Let them cheapen up gamma into tomorrow’s NFP report and then add some conditional call structures tomorrow after the number (be even better if you get a back up first!). More on that later….

Have a good Halloween and try not to scare too many kids,
mjc