All asset classes are rallying as the globe is apparently flush with fresh cash, even though FOMC, BoJ, and BoE all left rates unchanged while Norges Bank actually raised rates 25 bps from 1% to 1.25% in a thinly-veiled effort to defend its currency. But I digress: equities have rallied across the globe since yesterday while global bond yields continue to tumble, as seemingly every analyst is trying to be the latest to call for a 50 bps cut by FOMC in July. One more time: this is not going to end well kids! But I digress again. As of 9:00 AM ET, Treasuries yields were 1.5-2.5 bps lower in a small bull steepener (after flattening dramatically during the Asian session) while equity index futures were almost 1% higher ahead of the cash open.

The Asian session open was quiet for about 20 minutes, after which volume exploded. Japanese real money accounts began lifting UST 30s, around the same time Asian central banks started rolling out of off-the-run issues and into on-the-runs but adding extra duration on their purchases in 10s and 30s. On the break of 2% in cash 10s, levered accounts were forced in, buying US 10s and 30s, FVU and USU contracts as well. Not to be left in the dust, RBA’s Lowe signaled that the central bank in Australia was ready to cut rates as needed, his remarks even more dovish than he had been lately, as chance of RBA cut went from 55% yesterday to over 82% today. Aussie rates rallied 4.5 bps in 10y space, but were outdone by Kiwi yields finally participating and dropping 8 bps on the session. JGBs were the laggard, rallying only 3.5 bps (-.175% yield in JGB 10s now), while JBU 10y futures matched their highs from back in 2016. Japanese real money received in USD 7y, 10y, 20y, and 30y swaps while Asian real money used some early underperformance of the front end to add 2s10s, 7s10s, and 5s30s steepeners later in the Asian session through the open of Europe. Asian real money also was a seller of TIPs, finally throwing in the towel on that idea. Locally, Japanese pension funds and lifers were aggressive buyers of JGB 20s and 30s early, then lifted 10s and 30s after the BoJ nonevent. Money managers led the buying of Aussie 10s, forcing short covering from banks and levered accounts. In equities, China led the rally with CSI 300 up over 3%, while NIKKEI was the region’s laggard rallying “only” .6% after the BoJ cut its domestic growth forecast.

Volume lightened up into the European open, while bunds repriced after the large Treasury move. Market traded sideways on the combination of continued good real money buying from Asia and Europe but also some concession building ahead of large supply from peripherals. Comments from Chinese commerce ministry that alluded to China and US solving their trade issues pressured Treasuries, before two block FV trades shortly after the European open, the first a sale of $494K in DV01 for 5s that made the low since the Asian open closely followed by a block purchase of $600K in DV01 for 5y sector that took us back toward the highs. You get the idea. Theme for US fixed income during Europe was unwinding the flattening from the Asian session, as real money accounts aggressively received in USD 2y and 5y swaps, while European central bank lifted US 10s and received in USD 5y swaps. Once supply was out of the way (mixed 3s, 5s, and 15s in Spain; 4s, 5s, 6s for France along with 5s, 11s, and 28s in French Linkers), European bond curves resumed their bull flattening bent, even as US bull steepened (re-read that part, in case you want to discuss pain again). Early schatz selling ahead of the French supply saw short covering actually lift the belly after the supply. BoE was a nonevent, but that didn’t prevent gilts from being dragged along all morning on light volume ahead of the BoE announcement, only to make a power catch-up move on the BoE cutting growth forecast this year from +.2% to flat (oucha!) and highlighting the disparity between the “official” view of Brexit and the market’s view. Italy is leading the peripherals, while equities are marginally firmer across the continent but lagging the rest of the globe severely over the last 48 hours.

Today’s data thus far has been a nonevent for the market, even though Philly Fed should be a major disappointment. Data does not seem to be relevant for the moment because larger forces are at work; we’ll get to that later. No Fed speakers today, bummer, because that is going to get interesting. We do however get $15BN in reopened 5y TIPs at 1 PM ET. That will NOT go well unless they cheapen up appreciably, even at these levels.

So, ummm, the 8 dealers who are now calling for a 50 bps cut by the Fed in July since later yesterday??? Ummm, what’s that gonna do to the dots???? Maybe it’s time to officially and once-and-for-all retire the dots. They are great for filling time on television interview shows, but quite useless beyond that. Again, I digress, but one more time: all asset classes are rallying hard here today, and vol is not going bid. Sure it’s not, because this is just the hare in the warm water who doesn’t understand the hot tub is about to get to unsustainable temperatures. We expected that there would be more pain, but central banks are actually going to supercharge the pain. This is going to end very badly. We are trading 2% in cash 10s, at cycle highs in employment, growth, and (unfortunately) deflationary pressure. Textbooks say next move must be higher inflation; textbooks are wrong this time. But that will come eventually, after everyone with that position gets blown out. Pain is to a resumption of the steepening move, the further lower funding curves, and the higher vol. Over the next week, idea should be to shed any excess gamma at better levels than this (will get that chance), maybe even pay in 3y sector in swaps (stay away from 5s because Asian banks will continue to load up). But around payroll next month, when hedge funds do the knee jerk selling of gamma, time to add more synthetic call structures in 5y tails. More on that when I get back from my work travels…. As for choice today in TYU, let’s call the range at 128-12 to 127-29+ for the rest of today. We opened last night down at 127-26, and should not get back below 127-29+ today. As for rest of support, if we take out the 127-29+ level, watch 127-20+, 127-15 and 127-12; meanwhile, resistance comes in at 128-08 (overnight high), the 128-12 level, 128-20 (equivalent 1.925% in cash 10s), 129-01 (the oh boy extension level). Keep your aspirin close and your hazmat suit closer….

Have a good Thursday,
mjc