this week’s bear steepener continues into Balloon Tuesday

Treasuries have resumed their fairly impressive bear steepening, risk on rally that began yesterday and has been re-energized since NY arrived. Treasuries have bounced off their worst levels, to trade flat to 1 bps higher in yield, while US equity index futures are mixed, DOW and S&P well off their best levels of the night but with the NASDAQ steadying ahead of the cash open.

The best volume of the night was again on the Asian resumption to trading, as we tested the high yield made just before 5 PM ET on Monday. CTAs sold US and WN contracts on the open, but that selling was met with better Japanese real money buying of US 10s and 5s against .77% yield in 10s and .34% in 5s, while RV account lifted FV to sell US contracts. Market steadied, volume dried up, and Treasuries drifted higher through the Tokyo lunch as volume dried up. Risk was dented by stories that House was looking at competition in the tech sector, helping further underpin Treasuries after the Tokyo lunch.

It is pretty clear that if you want to sell Treasuries, your best entry time consistently has been the European open, for awhile now. The usual central bank buying of WN contracts, 10y cash, and mortgages took us to the highs of the evening as has been the case for weeks, just before London opened. A block buyer of 3407 TYZ at 1:05 AM ET (6:05 AM BST) for 138-29 (+305K of DV01 in 7y sector) further bid Treasuries into the open. Treasuries broke as bunds came under early pressure, with levered selling of 10s and TY contracts, while deal-related paying was seen in USD 5y swaps and macro account paid in USD 10y swaps and sold cash 20 outright. Treasuries supported by UK real money buying of 5s and 7s, along with some buying of 2s and 3s by central banks. The arrival of NY saw bank selling of 20s and paying in USD 5y swaps, the latter deal-related again. The break through yesterday’s settlement in WNZ saw CTA selling in ultras further steepening the curve.

Locally in Asia, RBA policy statement was largely as expected, but a warning about the budget statement saw rates head for cover, while JGBs were dealing with 30y auction. JGB yields backed up 1 bps in 10s, steepening out to 20y sector, while Aussie 10s saw yields jump another 4 bps as domestic accounts continue to unwind cross-currency trades in 10y space. Kiwi yields were 2 bps higher in a largely listless trade. Asian equities traded higher after yesterday’s US strength, rallying between .5% and 1.2%; China remains on holiday for one more session.

Europe opened flat to marginally higher for rates, but the dual whammy of corporate issuance and sovereign supply overwhelmed the market eventually. OATs have tightened to bunds in the selloff, but rest of peripherals are small wider. The German 10y linker was technically uncovered with a large tail that caused some minor indigestion, while Austrian 4y and 10y were better subscribed. Gilts were supported by good demand for a 30y gilt auction, small tail and very well bid. Comments from Lagarde (risk is for uneven and shaky recovery) and pressure on European equities saw better real money buying of bunds just before US arrived.

Today’s US data calendar remains light, with only trade balance (in line, released at 8:30) and JOLTS data to be released at 10 AM ET. Powell kicks off a list of official appearances today, speaking at 10:40 AM ET to NABE conference with a moderator question period after; Harker speaks at 11:45 AM ET, Bostic at 2 PM, and Kaplan at 6 PM ET. Of course, Treasury will kick off this week’s supply dump, with $52BN 3y auctioned at 1 PM ET. Reheated 10s and 30s will follow Wednesday and Thursday….

Well, somehow missed the magnitude of this bear steepening since yesterday morning. Something seems very fishy here. But caution is prudent advice now. Want to be a buyer against .80% in 10s, but something tells me this is a timing thing (i.e., tomorrow around the auction set up) rather than a level unless you are going to tag 0.825%. With that in mind, let’s call the range today at 139-01+ to 138-19, after an overnight range of 138-30+ to 138-23. Support comes in at 138-23, but that should not hold, 138-19 objective as extension on the range, 138-15+/16 (.825% equivalent in cash 10s), 138-13, 138-09+, 138-05; resistance comes in at 138-27, 139-01+, 139-03, 139-10, 139-15. Let’s keep an eye on this 3y. Get the feeling it goes ok, we live with another bear steepener into 10s and then we go bid. Seems easy enough….not!

Have a good Balloon Tuesday,