The latest tariff escalation between US and China resulted in yet another risk off trade overnight, but this time there is a gnawing feeling that the trade may stick a bit. Global equities swooned under weight of the headlines, while fixed income has rallied. Treasuries are 3-4 bps lower in yield at 8 AM ET, led by the belly while US equity futures are down 1-1.5%.

With yesterday evening’s directive from President Trump for the USTR to find another $200BN in Chinese goods to slap tariffs on followed by China’s quick response that it will retaliate, Treasury futures shot higher an hour after the Asian open. Early buying saw hedge fund lifts in TY contracts, with CTAs forced in once we took out Friday’s highs in TY and US contracts. Asian real money wasted little time lifting FV and US contracts. The fun really kicked off later in the Asian session as Asian banks used the bid to pay in USD 5y and 10y swaps, at roughly the same time that Japanese real money was receiving in USD 10y and 30y swaps. Locally, JGBs trailed Treasuries slightly, with JPY outperforming the greenback, as the flight bid helped MoF auction 30y bonds to small tail and decent demand.

The European trade saw more risk off, as market was keen to find the blemishes. Shortly after the European open, RV account stepped up to add USD 10s30s flatteners in swaps as activity in swaps was very good throughout the evening. US/China relations may have been the catalyst, but a quick 10 bps widening in Bund/BTP 10y spreads on the open was not overlooked either. Leverage accounts of all sizes and shapes lifted bunds and bobls on the open, while RV accounts lifted bobls against schatz ahead of supply in the latter; macro account bought block of RX (EUR 500K in DV01) against TY (block seller 7560 TYU8 for 120-02 at 4:56 AM ET, dumping $570K of DV01). A poor and technically uncovered schatz auction was but a speed bump in the road. Gilts have largely tagged along for the ride, garnering little focus on their own thus far today. Just before NY arrived, 22K TYN 120.5 calls were rolled out to TYQ 122 calls, taking in 2/64 credit. We have basically flat-lined since NY arrived, trading sideways 3-5 bps better than 3 PM marks yesterday.

So there you go. Treasuries stopped just short of some important levels overnight, not the least of which would be the 120-08 level in TYU that represents a technical resistance level but also is an important level given the large number of conditional shorts at 120-00 via the TYN, TYQ, and TYU 120/122 call spreads that market makers and dealers were lifted out of last week. You could feel then that somebody has something at roughly 2.90% in 10y Treasuries/2.95% in 10y swaps. None of you have been kind enough to share yet what that exposure is, but it won’t matter soon enough. Thought we had a few more weeks before the kettle boils (Italy will be part of the stew, and they have bought a couple weeks here), so not sure we should embrace this right now. For choice, will call the range in TYU 120-08 to 119-23+. Personally, would take a short here against the 120-08 level and look to cover on a trade to 3% in cash 10s. Should be a few more weeks before the lid blows on this (think the TYU 120/122 call spread). Above 120-08 in TYU, watch out as we could easily run resistance at 120-15/16 and head straight for 120-23+.

Today’s calendar in the US includes housing data at 8:30 AM ET, but most eyes will be on Sintra Forum in Portugal, where Bullard is speaking with ECB’s Lane on a panel right now. The rest of our time will be spent watching for Tweets and Gooooooals….

Have a good Tuesday,

mjc