Markets traded in confined ranges overnight, waiting on wealth of supply in Europe and the US open to apparently make some decisions about this day. ADP in a few minutes will get a busier calendar rolling as we head into tomorrow’s NFP report. As of 8 AM ET, Treasuries were flat to mildly worse in long end, with equity futures flat.
The Asian session was a fairly tame affair, fixated on JGB buyback and watching EM currencies. Treasuries saw Japanese real money selling of 7s, Asian real money buying of 10s, some deal-related paying in USD 10y swaps, a macro account adding 5/7s flatteners on the USD swap curve, and a credit desk receiving in USD 30y swaps. None of these trades got things moving enough to take us out of a 3/32 range in TY contract though, with a small uptick early in the Asian session, but a pullback into Tokyo lunch that left Treasuries flat-lining through the London open. Locally, JGBs were underpinned by larger amount of BoJ buying program, while Aussie 10s marked time ahead of tomorrow highly-anticipated issuance in 2030 bonds. There was a lot of chatter about the impending Cigna issuance to finance its purchase of Express Scripts, with Cigna’s Q2 10-Q indicating that they have already placed $3.5+ BN in swaption collars that will be transitioned to swaps as a hedge against rate risk into the pricing. As for equities, Chinese and Japanese shares were marginally lower (CSI 300 now down 23% for the year), but most of Asian EM was steady after yesterday’s beating.
As indicated earlier, Europe was all about supply in Spain, France, and the UK. The session kicked off to almost no flow, but bunds let Treasuries to their highs of the session (1.5 bps better in the belly, don’t get carried away) on soft German factory orders. Spanish issuance in 5y, 10y, and 30y was sloppy at best, with larger-than-expected tails even as Italy was leading peripherals tighter the last two sessions; Spanish 3y inflation notes fared slightly better. French 10y supply was well-received, but the same can’t be said for 13y, 16y or 48y paper, the latter simply being taken out to the woodshed against the rest of the French curve and the buxl. The 2024 Gilt supply fared little better, with a larger-than-expected tail and soft bidding; gilts came under pressure after the supply but have been boot-strapped higher by bounce in bunds. Bunds were bid once the heavy dose of supply was done, regardless of how sloppy the results appeared. As for peripherals, there is a lot of noise in Italy, but BTPs keep trucking along, with a nice curve steepener to boot today, all fairly bullish signs; BTPs are 7 bps tighter to bunds in the 10y sector again today with 2s even better. This is despite reports that Salvini wants to appoint Bagnai as the “Economic Voice” to the ECB, thereby empowering a known Euroskeptic and the head of the Senate Finance Committee as Italy’s official voice to the ECB. Oh boy…. Flow wise, we saw better selling of US 30s by dealers, buying of 5s by European banks, central bank selling 7s, macro buying of US 10s against bunds, RV buying of bunds and bobls aggressively after the supply: no different flows than one would expect after the lead up to the European supply. Equities are slightly firmer, with greenback under minor pressure into the US day. Since NY walked in, there has been better paying in the USD 10y sector and outright selling of US 30s and USZ contracts.
Today in the US, we get ADP in a few minutes (8:15 AM ET), followed by claims and nonfarm productivity at 8:30 AM. At 9:45, we’ll get Markit Services PMI before ISM nonmanufacturing at 10 AM, along with final durable goods numbers for July. Williams speaks at 10 AM ET in Buffalo, and then we’ll settle in for the entertainment ahead of tomorrow.
ADP in a couple minutes, so let’s keep this short. If we back up to 2.95% in cash 10s, would assume gamma would cheapen enough to make FVU vol a good buy: consider adding FVU (15 days to expiry) calls ahead of tomorrow, struck 15-25 bps out. As for range in TYZ today, call it 120-06+ to 119-22+, with support below at 119-19, 119-06+, 118-27+, 118-23+. Above 120-06+, wtach 120-08+, 120-12+, 120-19+, 120-26.
Have a good day….
mjc