Rarely write on a Friday, but this is fairly important. Other than decent data in China (GDP and retail sales in line, IP slight beat) and the recent softness in UK continuing (retail sales for December was -.8% vs expected +.8%–ouch), the trading world’s focus has been on the surprise Treasury announcement last night. So today’s write-up will focus on that event. As of 7:45 AM ET, US 2y yields are down 1.5 bps, 30y yields are up 1.8 bps, swap spreads are wider except in very long end, while US equity futures are marginally firmer ahead of the cash open as global theme is small risk on to wrap up the second week of the new year.
Here is what you need to know about the new 20y and the market’s reaction, as this is all anyone cares about this morning:
* Last night at 5:50 ET, US Treasury statement caught everyone off guard with an announcement that it has decided to begin issuing 20-year bonds shortly; market expects first issue to be with May refunding during the week 3s, 10s, and 30s get issued (week of 11 May 2020). The statement indicated that details would be forthcoming at the next quarterly refunding news conference (Feb 5th).
*Since Treasuries and futures were closed then, US Classic (USH) opened 13/32s lower while Ultras (WNH) opened 17/32s lower at 6 PM ET. Cash then opened in Tokyo with 30y gapping 2.5 bps higher in yield as cash 10s jumped 1.5 bps higher. TY futures (7y duration) only opened 2.5/32s lower, while FV and TU were actually higher (still are).
*At 9:05 PM ET, there was a block futures fly bought:
-6000 TYH bought for 129-03
-5000 USH sold at 157-06
-1400 WNH bought for 184-03
So that is 500K in DV01 of 7/20/30 fly bought (selling US Classic, modified duration of 19y with USH CTD 4.5% of 2/36).
*Flows saw central bank selling of cash 10s and 30s to buy 5s and 7s, some RV buying of 7s outright and against 10s in London hours. From the outset in Asia, there was good volume in US long end, cash and futures, with better paying in USD 5y and 7y swaps by Asian banks. Volume in swaps was very good in Asia: some receiving in USD 30y, the aforementioned paying offset by levered accounts receiving in 5s and 7s both outright and on the curve against 30s, especially in the 5s30s steepener.
*The steepening and the wider swap spreads in the front end are helping to keep vol bid early this morning, so let’s see what happens. Nothing quite as entertaining as seeing 2s 1.5 bps lower in yield while 30s are 2 bps higher in yield without anything else going on in the world. But this should theoretically be good for vol after a week spent selling gamma…
Enough for now. Have a good, dry, warm weekend,
mjc