After a fairly tame Asian session, Treasuries have decoupled from every other instrument and rocked higher shortly after the European open on the combination of month end buying and technical breaks. Treasuries are 1 to 2 bps lower in yield from 3 PM yesterday; stocks have steadied at marginally firmer levels in equity futures on hope for the Korean Peninsula but nerves in the complex remain frayed.
The Asian session was a fairly tame event for Treasuries, but the trade in JGBs and Australian rates should have been a good clue of what was to come. Equities opened under pressure after yesterday’s poor close in the US, then rallied on confirmation of meetings between China and North Korea. US flows saw better real money interest out of Japan to sell 5s and 7s, with Asian bank paying in USD 5y swaps; most of the flows out of Japan were ascribed to repatriation ahead of fiscal year end and USDJPY moves seemingly confirmed as much. There was some lifer selling of US 30s later in the Asian session while RV account lifted a couple slugs of 2s and 3s to take some money off the table. JGBs put in an interesting session with 2y yields backing up .5 bps ahead of next Tuesday’s supply in that sector, as this week is effectively wrapping up; however, year end buying by lifers in the new 40y bond resulted in 2.1 bps of flattening in the 2s30s and 2s40s curve in JGBs. Australian market saw similar flattening as front end bills remained under greater pressure while back end saw month end extensions as 3/10s flattened 1.5 bps but bills to 10s was 2 bps flatter. As for equities, the Korean Peninsula lifeline didn’t come quickly enough to undo the effects of yesterday’s US FANG debacle, as most Asian bourses closed down between 1-2%, with the Hang Seng suffering outsized 2.5% losses on the US pressure for tech sector.
The European session started calmly enough, but when month end buying took bunds back through .50% yield, everyone took notice as hedge funds and CTAs were forced to lift RX and UB contracts. Flows for most of the European session were skewed heavily towards futures. There was really no data and little issuance to move markets, but the technical buying was rather impressive. After the bund pop, there was some European real money buying of 10s that forced CTA buying in TY and US contracts as we broke through yesterday’s highs; mid-morning in Europe there was aggressive buying of US and WN contracts that may have been tied to month end extensions out of Asian real money accounts, followed by the big capitulation trade for the night as a large TY/RX trade went through that took Treasuries into their own orbit and brought about the trade to 2.74% in cash 10s. With the US front end not participating, the move in 2s10s and 5s30s brought out some RV unwinds on the curve. Italy issued 5- and 10y BTPs that went just fine, with BTPs actually tightening slightly to core after the supply. The buying Treasuries slowed before NY arrived, but Treasuries have held to middle of the overnight pop since, likely waiting for a cue from stocks after cash opens. European stocks are treading water at the moment, giving little additional clue as to how US may trade today.
Today’s US calendar brings us a bit more data, but nothing extremely relevant: final Q4 GDP prints at 8:30 AM ET, along with Trade Balance and inventory data, while we will get pending home sales at 10 AM. Fed’s Bostic speaks at noon ET in Atlanta. Of course, the big event of the day will be the Treasury’s issuance of $29BN in 7y notes at 1 PM ET, but not to be forgotten is the $15BN in 2y FRN at 11:30 to serve as an appetizer.
Okay, through 2.8% in 10y yields thanks to our friends in Europe, and we managed to actually trade as low as 2.743% on the heels of the 10s/bund switch. That’s called breaking through in some circles. But before we wander too far, let’s take a look at stocks, and it’s not pretty. While equity futures did some fairly nice things ahead of yesterday’s cash open, the best that the cash SPX index couls muster was a 2674.78 trade, before it failed. The “aggressive” level of 2673 for all intents held like a champ, which is quite worrisome for anyone looking at this as a correction. The other issue here is the way we keep trading up in equity futures overnight only to get crushed like a bug hitting a windshield during the US day. Look for a break at some point today to test 2585/2580 in the index, then maybe (just maybe) we can get a bounce in a quiet market tomorrow. But the die is officially cast for next week to potentially be quite a seminal week for this rally.
As for Treasuries, we are seeing the month end buying and now we await (hopefully!) a retest of 2.8% to see if there is something larger afoot. My guess is 2.8% will hold on a test and we’ll be talking about a “new range” into next week. For choice today in TYM, call the range 120-31+ to 121-17+. Would love to see us get to 120-25 (top of value yesterday) but risk is all to some month end buying and the better than 50/50 chance of a rollover in equities. As for levels in TYM, resistance comes in at 121-09/09+ (overnight stopped here), 121-15, the aforementioned 121-17+ level, 122-02, 122-05 (equivalent 2.625% 10y); support comes in at the aforementioned 120-31+, 120-25, 120-18+, 120-15+.
Have a good hump day….