While it has been a quiet market in terms of market activity and price movements, there is no lack of flames nipping at the boiling cauldron. It’s getting hotter in the kitchen, just no pots boiling over yet but the flames are definitely high. As of 8 AM ET, Treasuries were .5 bps lower in yield while US equity futures had given up their earlier gains to trade flat to marginally lower ahead of the cash open in 90 minutes.
The Asian session was fairly quiet, with US/China trade tensions receiving exaggerated attention and accounts not real interested in taking a view. After Navarro’s comments late yesterday helped stocks trim their losses into the 4 PM close, Treasuries softened into their 5 PM close, reopening softer in Asia. Flows saw some fast money profit taking in FVU and TYU contracts through the Japanese open, but Japanese corporate receiving in USD 3y and 5y swaps helped the belly hold in despite impending supply over the middle of this week. After Tokyo lunch, Asian bank again sold 5s, while Asian real money lifted 10s and RV account added USD swap 10s30s flatteners. All in all, flows in USD were fairly quiet though. Locally, a decent bid for new JGB 20y issue at auction was offset by sloppy pricing that left the market thoroughly bored; by sessions end, JGB curve points were all within .5 bps of Monday’s marks. An article in the Chinese Securities Journal that PBoC would cut RRR another 50-100 bps in 2H2018 helped support rates in China, and in knock-on fashion helped support the recent bid for AUD 2y swap receiving as more of those flows went through. Asian equities were mixed, with Japan up small, China down small, and all other indices mixed in a largely boring session. Treasuries came under greater pressure into the European open with hedge fund selling of 10s (tons written about how this was profit taking, bizarre) and paying in USD 7y swaps.
The European open saw mild pressure on bunds related to BTP issuance today and talk of the size of tomorrow’s Spanish supply. Gilts added to the pressure ahead of the reopening the 1.75% 9/37 gilt. That said, Treasuries actually outpaced bunds and gilts on the way down, with RV accounts selling 2s and 5s outright and against 10s ahead of supply today and tomorrow. However, a bid to bunds as BTPs gapped wider changed all that shortly after the European open, with risk coming under pressure. BTPs managed to gap out to 8 bps wider to core, 9.5 bps outright, after a soft 5y auction but a decent 30y event. It seems more likely that Spain’s impending issuance is pushing that sector wider in general, with Italy just having a good head start, aided by news reports of growing popularity in the North for populist parties. US equity futures have leaked lower as DAX has led the loss of much of the early European stock gains. The gilt auction was a mixed bag, decent bidding and sloppy pricing (gee, theme emerging here), but gilts soon found support from BoE Haskell comments that “(any)more slack in the economy would weaken the case for interest rate rise.” Flows since mid-morning in London have not picked up, but there has been deal-related buying in bunds and gilts, RV buying of bunds and schatz on the Italian weakness, real money buying of US 10s, Asian real money buying of 30s for month end, and more RV selling of 2s outright and on the curve against 10s.
So the pressure ramped up again over the weekend with the latest escalation in trade banter between the US and China, but amazingly Treasuries found very little bid either on the trade issues or the crisis in Europe. Even more, we are in the zone for month end buying and Treasuries seem to be fairly well-contained within the range. One of the reasons, at least the thinking here, was that it would take a bit longer for all this to play out, the market not short enough to really squeeze positions. At least last week’s buyer of the TYQ 120/122 call spreads (75K sold at 30/64 to 32/64 after being bought for 19- to 21/64) got out of the way; meanwhile, commitment of traders continues to show the trend as levered accounts covering in US classics and money managers adding to shorts in the belly (i.e., the real position is long so nothing to squeeze there). Think we have to deal with the month end and noise for now, but looking for a back up to start the third quarter, nothing huge but a 3% trade would work to get long. For choice today in TYU, let’s call the range at 120-05 to 119-27+, but clearly the risk is to make a run for the far more important 120-08 level early in the session. Take that out and it’s hello 120-15+, 120-22 and 120-31 plus any other levels you wish to call on our way to 2.65% in 10s! Any pullback below 119-27+ would be a gift, say like 119-21+ or 119-17. This stinks: don’t want to buy here, but certainly can’t sell….
Today’s calendar includes a raft of data no one cares much about given the tape watching: HPI data at 9 AM ET, Richmond Fed and Conference Board at 10 AM ET. Fed’s Bostic speaks at 1: 15 PM ET with Kaplan talking at 1:45 PM. The biggest event of this summer Tuesday will be Treasury’s auction of $34BN in new 2y notes at 1 PM ET. Just like the other auctions thus far today, look for decent demand but sloppy pricing.
That will cover it for now….Have a good Tuesday,