Treasury buyers emerge with arrival of London today, but volume light (Monday)

Treasuries are trading higher and flatter in an otherwise quiet market to kick off this week. There is nothing on the docket today, save a 3y Treasury auction, but the week heats up on Weds with inflation data and the FOMC announcement. Some time after Thursday, markets will go into official year end mode. As of 9 AM ET, Treasuries are 1-3 bps lower in a bull flattener, while US equity index futures are down less than .1% ahead of the cash open.

Treasuries were under slight pressure early in the session, albeit with lighter volume, as JGBs were sold after a strong revision to GDP in Japan, jumping to +.4% from +.1% in last month’s estimate. Flows in Treasuries saw some Asian bank selling of 5s, RV selling of 3s to buy 5s, but also some small deal-related receiving in USD 30y swaps along with a Japanese lifer lifting WN small. Volume stayed quiet throughout the session with prices drifting sideways until just before the London open. Locally, JGBs were sold throughout the session, with CTAs stopped out on the break of April’s lows in JBZ, while levered accounts pushed yield on the 10y back to .05%, in keeping with the new BoJ policy of artificially steepening the curve. Good results from the BoJ buyback in 10-25y bucket (because 10s were trading above 0%, the BOJ’s announced target) brought out some short-covering later in the Asian session as JGBs closed 1 bps lower on the session at .03%. Aussie and Kiwi rates stayed under pressure, with a soft 12y auction weighing on rates in Australia; Aussie 10s closed 2.4 bps higher at 1.151% and New Zealand 10s were 6 bps higher at 1.533%. Asian stocks were mixed, little changed, higher across most indices, with Hang Seng as usual lower.

The European session saw small but consistent US fixed income into and through the London open, with Japanese real money lifting 7s and 10s, along with a smattering of spread product (less MBS though), along with European real money buying of 5s, 7s, and 10s at various times from the open through mid-morning in Europe. Just before the London open, someone took advantage of the flattening to do a slightly mis-weighted FV/TY steepener, lifting $275K of DV01 in 5s (+5700 FVH) to sell $300K of DV01 in 7s (-3750 TYH). But the flows, light as they were, remained skewed to better buying of Treasuries, as Asian central banks stepped in to lift 5s and 7s as well mid-morning in London. As US arrived, there was better effort to sell 3s and 10s, the former outright with the latter both outright and on the curve against 7s, ahead of supply today and tomorrow; however, there has been better buying in long end by real money accounts since just before the Chicago open. Strong German Oct export orders (+1.2% vs -.3% expected) had little impact on thinner trading markets, as bunds have followed Treasuries higher since the open. There seems to be decent real money appetite in Europe to add duration in US, Germany, Greece and Italy, with GGBs and BTPs leading peripherals and global rates this AM (BTP 10s -7.2 bps in yield; GGB yields down 9.9 bps), even as the political situation in Italy becomes more tenuous by the day. Gilts are trading very quietly ahead of general election on Thursday, dragged higher by rest of the rally in European rates. European equities are small lower at the moment.

The calendar today is empty save for $38BN in new 3y notes to be auctioned by Treasury at 1 PM ET today; the event calendar really won’t get going until Wednesday morning.

Before we go any further, want to take a moment to point out the updated Commitment of Traders report that came out Friday (through Tuesday, 3 December). Speculator position in US classic went from net short 69K to net short 90K, while even more impressively (well, not if you’re short) the WN ultra future went from net short 348K contracts to a new record net short for speculators of 363K contracts. FV and TY also saw increases in the speculator net short position, but it is the long end that is all that matters in these surveys, since that IS the only place for duration in this world. The bond being north of 90K absolute position is indicative of a market that is overdone. Plus the last two sessions should have added to the short position for speculators as well. If we aren’t at a resumption of the rally, we are darned close!

For choice today in TYH, call the range at 129-12+ to 128-28+ (overnight range is 129-05 to 129-27). Support in TYH comes in at 129-00, the aforementioned 128-28+, 128-23+, 128-17+/17, 128-14; resistance comes in at 129-07, the aforementioned 129-12+, 129-17+/18, 129-25+/26+, 130-00+. Like the idea of adding conditional calls via FVG options (get you through the year end, with expiry on Jan 24, 46 days), but other than that, it’s about hoping vol on greens cheapen up enough (they likely won’t before Weds!!!) to add some conditional calls there as we like the tightener there. Call if you wish to discuss; it will keep me and Andy from falling asleep all day….

Have a great Monday,