volume is crashing in another troubling sign for global liquidity (Wednesday)

It has been the lowest volume and participation day since the end of last year, as folks are exhausted and traders look to get on the sidelines for a bit. Futures volume was less than 30% of the quickly falling 20 DMA, and it was worse in Treasuries with even swaps tailing off. Agreement between the Senate and White House after midnight Eastern Time last night brought out a risk on bid, but that disappeared as we have moved on. As of 8 AM ET, Treasuries are .5 to 3 bps higher in yield in a continuation of the recent steepening, while US equity index futures are down between .5% and 1% ahead of the cash open.

The Asian session saw Treasuries and equities under some minor early pressure. There was Asian bank selling of US 5s in a vacuum that caused the 5s to underperform slightly before better Asian month end buying materialized in 10s (but not 30s) after Tokyo lunch; no word of a deal for the stimulus package also weighed on stocks. US fixed income was also underpinned by inability of BoJ to end dollar hoarding locally. JGBs were under pressure even with aggressive term funding and O/N repos in JPY and USD swap lines; the inability to move cross-currency spreads in Japan is causing everything to lock up there no matter what the BoJ tries to do. JGB 10s were .5 bps higher in yield, but JGB 5s were 4 bps higher. Australia meanwhile did another buyback, but this time in semi-government bonds, totally ignoring ACGBs; the selling in official Aussie rates was harsh as yields in the 10y sector there backed up 8 bps, weighing on Kiwi rates as they were 8.5 bps higher in 10y space. It is not pretty Down Under right now. As for equities in Asia, they all took a cue from the “Balloon Tuesday” trade in the US, with NIKKEI rallying 8%, and rest of Asian up between 2% (China) and 6% (Australia, New Zealand, India).

When a $2TRN deal between the White House and Senate was announced shortly after midnight, risk took a leg higher as Treasuries broke a quick 4-6 bps in a bear steepener, on no volume. Off the lows, there was better Asian real money receiving in USD 5y and 10y swaps, but 30s saw better selling in cash (stimulus deal would have to be paid for somehow). However, the deal must still pass both houses of Congress; there was a stark reminder of the hurdles still in the US when EU Finance Ministers failed to reach their own stimulus deal last night; that last event pretty much ended any hope for risk throughout the rest of a quiet European session. Treasuries have seen some small central bank buying of new 2s and mortgages, European real money buying of 10s. As Europe got going, there was better deal-related selling of US 7s and 10s, along with dealer paying in USD 30y swaps, as the issuance calendar is growing quickly just like yesterday. The most interesting trade in Europe was when US 30s finally decided to play catch up as Asian real money account lifted 30s for month end: no volume but a quick move to reverse much of the all-night steepening. There has been very limited flow in futures and even exchange options again today.

European fixed income trades mixed, some pressure on Germany (to pay for stimulus) while peripherals are generally a couple bps tighter to core. There was central bank buying of BTPs and SPGBs and some RV selling of bunds to buy OATs again last night. Core European bonds saw better selling of bobl, bund, and 5y gilt sectors in deal-related flows, while there was better paying in EUR 30y swaps both by dealers and macro accounts. Volume in Europe has been worse than USD products. Equities are mixed in Europe as well, with DAX under pressure but UK and France holding to slightly better levels, along with most other European bourses.

Today in the US, we will ignore durable goods at 8:30 AM ET, along with HPI at 9 AM. We will however closely watch the daily Fed POMO that kicks off at 9:50 AM ET today (7-20y sector again leads off). In the middle of it all, US Treasury will auction $18BN of reopened 2y FRN at 11:30 AM ET followed by $41BN of new 5y notes at 1 PM. Welcome to the brave new world: you sell and I’ll buy, just need to print some more dollar bills…

Okay, so Balloon Tuesday went swimmingly. That was easy enough. Now what to do? Well, think we have to give something back today, but we are in a zone here, and the calendar could help for a vicious contrarian trade. Seen several people looking for a temporary bottom and a “vicious” rally to 2700ish in the SPX. I see it, I get it, not sure I believe it. The rationale is that you have exhausted sellers, you have some “good” news that is bound to break, and (MORE IMPORTANTLY) you have month end rebalancing that will be huge. One note of caution: FTSE Russell has already announced a one-month delay of rebalancing for March (March will be captured in the April rebalancing, oh boy) in EGBI and EuroILSI. Wonder if the same happens for other indices? But for today, look for some early pressure in risk assets and then maybe we can base as the stimulus package moves to a vote. All these things could conspire to give us one great “buy the rumor (to SPX 2700) and sell the fact” trade in equities.

In Treasuries, it’s more of the same. Could be a long day. Any effort to get Ts really cheapened up has failed overnight, but after a “risk off/here comes the POMO” pop early in the day, maybe we can take Treasuries lower for the rest of the week and find some value. For choice today in TYM, let’s call the range at 137-21 to 136-20+, with an eye to make some hay through 136-20+ if you can break before the 5y auction. There is good resistance at 137-17+/18 (the overnight high too) but I think we can get a risk off trade early to be a seller up at 137-21. Other resistance comes in at 137-31, 138-06+/07, 138-18+, 138-30+, 139-03+. Support comes in at 136-29/29+, 136-26, the aforementioned 136-20+, 136-08+, 136-05+, 135-18. It’s pretty gappy on the downside. IF we fail to take out 137-09+ by the time the POMO gets started, just sell a USM contract and see how much you can make.

Have a good hump day,