UK downgrade Friday, China adds liquidity, US trades quiet and tame (Monday)

It has been an even quieter start to the new week, which I guess is okay. We could use lower stress every now and then. Markets opened in Asia to risk off, but found little to extend the theme until Europe came in and gave us a second risk off theme but on zero volume and no follow through. As of 9 AM ET, Treasuries are flat to 5 bps lower in yield from their 3 PM marks on Friday and bull flattening again, while US equity index futures are 1-1.25% higher than Friday’s settles ahead of the cash open.

Treasuries opened last night 2-7 bps lower in yield than Friday’s 3 PM marks to kick off the Asian session, but only 1-2 bps lower than where we had gone out Friday. Driven to the highs on the day after 3 PM Friday on the combination of late short-covering, some opportunistic buying of gamma in the belly (FV and TY) after those sectors got smoked between 3-4 PM ET, and the late downgrade of UK sovereign debt, Treasuries held those gains through the weekend. Volume and activity were light throughout the Asian session, as we largely traded sideways before some RV selling in 5s materialized just before the European open. Market barely budged during the long US press conference on the virus, with only a seemingly small, unsustainable risk off move when the US shutdown was extended until April 30. There was central bank buying of mortgages after Tokyo lunch, but again in smaller size; however there was better central bank and deal-related selling of 2s into the London open that began a fairly steep underperformance by the US front end for the rest of the night. There had been early Japanese real money receiving in USD 30y swaps, but by end of Asian session, flow was slightly better to paying in belly and 10y sector.

Locally, JGBs rallied .5 bps, New Zealand 10s were 6.4 bps lower in yield, while the big winner this session was Aussie 10s that rallied 15.6 bps after RBA caught market off guard in announcing AUD 3BN of purchases in the 6-9y sector of the ACGB curve, the first for tenors that long in ACGB instruments. The PBOC cut the 7-day repo rate by 20 bps to 2.2%, while increasing liquidity further through open market ops to the tune of CNY 50BN. There was bank buying of JGB 5s (against some of the paying in USD 5y swaps supposedly), another year end adjustment trade, along with better overall buying of JGB 10y by Japanese real money. Asian equity bourses were mildly lower overnight, down between 1% and 2%, except in Australia where stocks rallied 4% on the liquidity statement made by the RBA.

Early European trade saw some small deal-related selling in German buxl and US 10s, along with paying in USD 10y swaps. Treasury volumes got even lighter after the Europe got going, largely being dragged higher by the bid to Eurozone core. After trading as low as 62.4 bps midmorning in Europe, the arrival of US traders brought portfolio selling of USD 10s and better dealer selling in 5y space. Front end remained under pressure with some European central bank selling of 2s and 3s throughout the session and some RV adding of 2s30s and 5s30s flatteners in USD swaps, as rates came off their low yields of the session in the last three hours.

European fixed income has been much better bid since mid-morning on today’s PEPP/QE operations, while ignoring a strong inflation number out of Germany. All sovereign and core debt is trading better although bunds are outperforming. Of course, when one says “all peripherals” that excludes Greece and Italy that still have some issues given how much they had tightened in the last several months leading up to the crisis. There were month end extensions being bought in OATs and bunds, macro buying of buxl outright and on the curve in EUR swaps via EUR 5s30s flatteners, along with deal related selling in schatz and bund, as the European calendar grew quickly today, and there is large sovereign calendar already in place that kicks off tomorrow. Equities in Europe are mixed, slightly better for DAX, lower for CAC and FTSE.

Today will be about watching for issuance to price, selling the Fed more paper starting at 9:50 AM ET (the usual POMO schedule before it changes slightly beginning April 2nd), and then getting ready for month/quarter/(Japanese) fiscal year end. Final (delayed) extensions will be released later today, with Treasuries currently called .03 years, EGBs called .07 years, and Gilts set to extend a modest .02 years. The big thing will be if we see any more rebalancing (like we did Thursday afternoon), as that theoretical number is h-u-g-e, but we all know that theoretical exercise doesn’t often play out exactly as modeled.

There was some pretty aggressive selling of gamma via the exchange around the 3 PM ET marks on Friday, in direct opposition to what we had seen the past two months on Friday’s. Fear not though, as the pop in the underlying brought out aggressive buyers of those cheaper levels, both OTC and on the exchange. Pretty amazing, the most interesting part of the last two days of the week took place after 3 PM Friday! For choice in TYM today, let’s call the range at 139-11+ to 138-24, after an overnight range of 139-06+ to 138-19. Support below comes in at the aforementioned 138-24 level, 138-19, 138-16+, 138-12+, 138-04+, 138-00+, 137-24+, 137-15/15+. Resistance comes in at 139-01, 139-07, the aforementioned 139-11+, 139-17, 139-28, 140-01+, 140-18.

All right, sorry this is late….have a good Monday out there.