You can feel a different sense in the market first thing this morning as this brutally dull and long month of February grinds to an end. Risk on sentiment after positive Fitch ratings on Italy late Friday and Trump delay of further Chinese sanctions on Sunday have resulted in better volume and interest into the end of February. The calendar for potentially impactful events grows markedly over the next few weeks, which can only help. Volumes look even better in rate space as this is the week everyone finish rolling quarterly Treasury contracts. As of 8 AM ET, US equity futures are about .5% better than Friday’s close with Treasuries 2-2.5 bps higher in yield, led by the belly.

After Trump tweet postponing the March 1 Chinese tariffs ahead of the Asian open last night, markets opened to better risk appetite. In Treasuries, we saw hedge fund selling of TY contracts and cash 5s, along with some RV selling of 10s. Asia was better axed to buy as usual, with Treasuries bouncing after Tokyo lunch. As has been the case for weeks now, spread product remained in demand, with highlight today being better Asian central bank buying of mortgages, an interesting trade they have been doing for over a week now after Japanese lifers spent the first six weeks of the year lifting MBS. Asian banks were again better buyers of 2s and 3s in Treasuries while Japanese bank lifted 10s and 30s and received in USD 30y swaps. Japanese lifer was seen lightening up in long end, while Japanese real money was two-way in belly of Treasury curve, some buying of Treasuries against other real money accounts paying in matched tails. Locally, there was a lot of focus on Kuroda comments over the weekend in Asahi press that BoJ still has options should prices veer from their path to 2% inflation target (what does he know?), with Reuters then quoting Hamada (Economic Advisor to PM) that BoJ could abandon 2% target if needed (hmm, ditto). Need to keep an eye on this one. The Trump administration decision to delay tariffs brought out large rally in Asian equities, with Chinese bourses all up over 5.5%, while rest of Asia was up between .75% and 1.5%.

Europe opened to better selling of Treasuries and bunds, the latter being hammered by RV and hedge fund types who were unwinding trades against BTPs. The FITCH review Friday was taken by the market as a positive, as BTPs are some 6.5 bps tighter to bunds on the day, leading all the peripherals tighter. As they say in the movies, “the future’s so bright I gotta wear shades.” Let’s see what happens when the Italian politicians get involved shortly, but I digress. German Buxl has seen good dealer and real money selling ahead of the ESM EUR 2BN 10y issuance that is believed to then see 10y20y forward paying in EUR swaps as the ESM will lock in funding for 30y term; bunds have seen RV selling on the back of this issue as well. Treasuries saw RV selling of 5s outright and on the curve against 10s ahead of 5y (and 2y!) Treasury supply today. Dealers were small sellers of 5s to add concession, with 2y having already cheapened enough into the European open. After everything repriced shortly post-European open, market largely traded sideways until US traders arrived, at which point we saw hedge fund selling of 5s ahead of today’s supply. Gilts are trading lower, primarily due to pull of bunds and Treasuries, with little real impetus as the Brexit story paralyzes trading for now.

Today’s US calendar includes Chicago Fed National Activity Index at 8:30 AM ET, wholesale inventories/trade at 10 AM, and Dallas Fed at 10:30. Market will watch Clarida appearance in Dallas at 11 AM ET for any further clues as to balance sheet machinations ahead of Powell’s semiannual testimony before the US Senate on Tuesday (House on Wednesday). Treasury will auction $40BN in new 2y notes at 11:30 AM ET, followed by $41BN of new 5y notes at 1 PM ET; these auctions will take place around the normal weekly Treasury issuance of 3m and 6m Bills ($48BN and $39BN respectively) for a nice sum of $168BN in paper today. Welcome to debt financing…. Powell mid-week, quarterly calendar rolls wrapped up by Thursday, month end on Thursday, Trump meeting on North Korea, BREXIT, and don’t forget Italy actually has a few events upcoming that we are attempting to ignore.

All right, let’s try to keep this short. Last time we wrote anything, skews were getting completely annihilated; that has not really changed as we have priced out almost all chance of Treasury markets returning any realized volatility for the year. My main points would remain the same: 1) there is value in owning some vol here at these silly levels, just on a basic risk management basis; and, 2) equity vol/vix and rates vol have diverged with the former now at a nice premium to rates vol, leading to the conclusion that this is one more argument to own some rates vol. With everyone focused on the favored 5y5y sector, how about owning some 6m or 1y expiries on 2y10y? I like the idea, can’t stay here forever. Okay, for choice today in TYH, call the range 122-03 to 121-21 (the range overnight has been 122-04 to 121-29+), as the amount of supply early this week should make it easier to get some traction at higher rates for at least the next 26 hours. Support in TYH comes in at 121-28+, then the aforementioned 121-21, 121-17+, 121-07, 120-30+; resistance comes in at 122-03/04, 122-09+, 122-10+, 122-12, 122-17.

All right, welcome back and let’s see if there is something to write about tomorrow…

mjc