As we await the long vote count in the US, markets continue to trade better to risk but definitely continuing the flow of funds back into USD securities. BoE increased size of bond purchases (meeting was 5 hours earlier than normal at 7 AM BST) continuing the string of dovish central bank meetings since last week (ECB, BoJ, BoE), with the big event in the US being the FOMC announcement and press conference at 2 PM ET today. As of 8:45 AM ET, Treasuries are flat to 3 bps lower in a continuation of the bull flattening, while US equity index futures are up 1-1.5%, with NASDAQ continuing to lift all risk boats ahead of the cash open.
Treasuries were better bid from the outset last night, picking up where they left off on Wednesday, with US real money account buying US 10s from the cash open in Asia and a flurry of buying in FV, TY, and US classics from a variety of Asian account types. There was some small Asian real money buying of 20s and US classics as well. Once again, Japanese real money used the better levels to sell 10s and 7s, continuing their recent theme of lightening up in Treasury space. Volume in futures remained better than average, although but a quarter of the volume Tuesday/Wednesday. There was CTA buying in FV and TY contracts, with central bank lifting WN futures and mortgages into the European open. There was aggressive buying in JGB long end and Aussie 10s that also supported Treasuries after the Tokyo lunch, with Japanese lifers aggressively receiving in JPY and USD 10y and 30y swaps. Usual Asian bank paying in USD 5y swaps was offset by Japanese bank receiving in USD 2y and 5y swaps.
Treasuries quieted down a bit ahead of the BoE announcement, with the statement 5 hours earlier than normal at 7 AM BST. Traded the highs of the night in Treasuries on the announcement, with macro buying of US 10s and aggressive hedge fund receiving in USD 7y sector. Pressure on bunds and gilts eventually pushed Treasuries back to unchanged, but with better bank selling in US 2s and 5s. There was macro selling of gilts against both US 10s and bunds. There was a USD 10s12s15s fly, receiving on the wings, that was done by UK macro account just as NY arrived, supposedly against paying in GBP 10y swaps. Curve flatteners picked up again after NY arrived, with FV/US flattener being done an hour ago.
Asian session saw good follow through buying in Japan, Australia, and New Zealand rates markets. Good Aussie 10y auction only further underpinned fixed income. Around Tokyo lunch, better receiving in JPY long end swaps, along with outright buying in JGB 30s and 40s helped further flatten curves. Domestic real money bought Aussie 10s and NZD 10s. JGBs rallied 1 bps in 10y but 2.5-3.5 bps out to 40y on the curve, while Aussie 10s rallied 5 bps and Kiwi 10s rallied 5.5 bps. Asian stocks followed US equities from yesterday, with all bourses higher, led by Hang Seng (+3.25%).
Europe saw better buying from the open, with real money accounts lifting bunds and front end of the gilt curve. BoE announced increase of GPB 150BN in bond purchase (GBP 875BN total now), while Bailey paid lip service to role of negative rates in troubled times but was clear to emphasize that they are not warranted at this time. There seemed disappointment that the pace of purchases was not increased and that the BoE seemed to be tamping down use of negative rates as GBP rates came under pressure shortly after the meeting. Better selling of 10y gilts outright by bank names and then macro selling of gilts to buy US 10s further helped US outperform. Meanwhile, soft supply from Spain (20y, went okay after good concession build) and France (soft to weak 9y, 10y, 30y 35y) kept pressure on EZ rates throughout the morning. Peripherals eventually outperformed bunds on a buy program in BTPs, all despite more dire outlook for Italy on COVID. Peripherals are now 1.5 to 3 bps tighter to bunds. European stocks are trading higher, with gains of between .5% (FTSE) and 1.8% (Spain and Italy).
Today in the US, we get claims, nonfarm productivity, and unit labor costs at 8:30 AM ET. The big event of the day will be the FOMC announcement (2 PM ET) and Powell’s press conference at 2:30; that should be interesting and market will look to hear his thoughts on fiscal stimulus.
It has been an interesting few days, to say the least. There is a lot of talk about the driver for risk and the flattening on the curve. Will make the observation that maybe this is nothing more than money that had come out of the market now making its way back to work. Anecdotally, will observe that you hit unprecedented ratio of spec shorts to longs in US classic contract for the data released last Friday. Here’s the weird part: open interest increased in classic US and FV, as a matter of fact it increased huge across the curve except for ultra 10s. Money coming back to work and chasing the bad institutional short in the long end. Ohh, ohh, this has more to go kids. Going out on limb here that you need to see 96 bps in US 5s30s (currently 120 bps, 96 bps is the .382 of the steepening since summer); you should pause a bit for the refunding next week, but watch out afterwards. Meanwhile, with 30s keeping us bid, should see 0.60% in cash 10s and likely 1.25/1.3% in cash 30s ahead of the end of November. That’s a lot. Same with equities. Money on the sidelines is being put to work, but the outlook for risk does not look as bullish as it does for rates. Looks like equities should roll over between later today and sometime middle of next week.
All right, for choice today in TYZ, let’s call the range 139-09+ to 138-27+ after an overnight range of 139-08+ to 138-30 as things will likely quiet down into the FOMC meeting. Support in TYZ comes in at 138-30, the 138-27+ objective, 138-17/16, 138-10, 138-08, 138-05; resistance comes in at 139-04, 139-09+ objective, 139-18, 139-23. Vol got hammered and then hammered again yesterday. That will continue for now, but by tomorrow especially if we can get a pullback in rates today, would be a buyer of synthetic call by lifting USF 25% delta puts as you are getting to levels that represent value in what will remain a rather volatile period for awhile.
Enough for now, have a good day and stay safe,
mjc