volume gone again after a spike Tuesday as we await new 20y Treasury (Wednesday)

After a more active Tuesday with some better volumes, markets have turned quiet thus far for Hump Day, as risk trades better led by a bounce in US equity index futures that has market focused on global equities and sovereign supply. Volumes have dropped back to light, with limited activity overnight in Treasuries. As of 8:30 AM ET, Treasuries are 1.5-3 bps higher in yield, with a small flattening bias to the curve ahead of 20y supply, while US equity index futures are just over 1% better ahead of the cash open.

After Asia arrived in force to buy USD fixed income products on Monday night/Tuesday, we have returned to a quieter session thus far today. To review (or “since I was out yesterday”), Japanese real money lifted 10s and mortgages, Asian central banks bought 5s, received in USD 7y swaps, bought 30s, and lifted mortgages right through the European morning, while Asian real money lifted 2s and 10s after the European open. In other words, money in Asia is still there and was put to work at levels considered attractive to that client segment. Volume overnight Monday was almost three times the “shutdown” average.

Today is unfortunately a return to “normal” of late. Volume is below average, with some deal-related buying of 5s and 10s shortly after the Japanese open, some levered front-running in TY and US contracts in anticipation of Asian buying that never really materialized. Hedge fund selling came through as equities ticked higher, selling in 10s and some small paying in USD 10y swaps outright and on the curve against USD 2y. Asian central bank was small seller of 5s. After Tokyo lunch, activity really dried up with only some Asian bank paying in USD 10y swaps, and frankly hasn’t picked up during the European session at all. Treasuries followed bunds and gilts lower (sovereign supply concession) before they reversed after the issuance, taking Treasuries back to the middle of the range.

Asian session was about MOF 20y auction and AOFM 5/32 tap; the JGB 20y found good demand with only a .6 bps tail for a pricing concession, a very strong result. The Aussie pricing was even stronger with good demand and stopping .4 bps through. Both JGBs and Aussie rates rallied out of the supply and underpinned Treasuries in the process. Japanese investors were the primary buyers of both auctions. JGB curve flattened with 10y point .5 bps higher in yield, while Australia was 3 bps lower and Kiwi rates backed up 1.5 bps on some tempering of the negative rate idea. Asian equities traded mixed, China softer (-.5%) with rest of region slightly better.

Europe also was largely about supply. Talk of a counter plan to the French/German deal from Austria, Netherlands, Sweden and Denmark caused BTPs to trade softer with good retail selling of 5y and 2y sectors, but the virtual guarantee that Italian debt will be backstopped has helped soften the early pressure. UK 3y gilt auction was slightly soft, while German bund auction went reasonably well. France wins the issuance award: 3y, 5y, and 6y supply early to small tails and decent bidding, followed by linkers in 5y (soft), 10y (decent), and 15y (soft). Net of net, France has traded better after the supply deluge, Germany trades okay, and gilts trade better but that is largely on a soft inflation report. BTPs are well off their wides, but still 3 bps wider to bunds, with rest of peripherals less than 1 wider. European stocks are mixed despite the strength in US equity index products, either side of unchanged by less than .5%.

Today’s calendar brings us comments from Bostic at 10 AM ET, Bullard at noon ET, and the FOMC minutes at 2 PM ET, while there is no economic data due today. The big event of course will be the Treasury’s first foray into issuing 20y bonds since 1986, with $20BN to be auctioned at 1 PM ET. We saw how Japan and the rest of Asia reacted to the backup on Monday, so they clearly still have plenty of cash to burn, and thinking was these accounts had allocated funds for the 20y. But there is no one saying, “I have been told…” Obviously no history (34 years ago does not count!), but most dealer pieces see 1.23%/1.25% as fair value (1.227% for the WI right now), expecting at least modest demand today from investors as this represents a new point on the curve. The WI opened last Thursday at 1.09%, traded as low as 1.035% on Friday, and has backed up roughly 19 bps here, with a high yield of 1.245% for the WI this week. On the flipside, WI volumes have been pretty light in the week since the WI began trading. We’ll see what materializes this morning, but there is no doubt on fixed income’s focus over the next 4 hours.

Okay, and for choice today in TYM, let’s call the range at 139-05 to 138-22+, but still must preface with the signals have not been good nor very useful! It really is time for me to find that clue salesman again. Support comes in at 138-19, 138-11, 138-02, 137-28, 137-22; resistance meanwhile comes in at 139-03, the aforementioned 139-05, 139-09+, 139-15+, 139-19, 139-27, 140-02. Would think pressure into the 20y supply and if it gets distributed as seems likely at this point, then rally out of the supply. We’ll see….

Have a good and healthy Hump Day,