This market is like Chicago weather: just wait a day and it will reverse course. Today is all about whispers and and then a very fluff Bloomberg article that US and China are close to completing a Phase I deal. Duh. The reality is there is little conviction in the market heading into year end, and the last three sessions bear that out across asset classes. Today is a risk on day for now, with Treasuries 1.75 to 3 bps higher in a bear steepener while US equity index futures are .5% higher ahead of ADP and the cash open.

The Asian session opened quietly, but a strong Chinese Caixan report kicked off the risk on theme, as November’s number printed 53.5, well above expectations of 51.2 and a last of 53.1. There was hedge fund selling of 10s and TY contracts, Asian real money selling of FV and TY contracts along with paying in USD 10y swaps. After repricing 3 bps higher in yield, Treasuries saw better two-way flow for the rest of the Asian session. Japanese real money sold WN contracts after Tokyo lunch, some deal-related flows saw better paying in USD 5y and 10y swaps, and CTAs were better buyers of TUH and FVH futures. One theme that emerged was RV adding ED whites/reds steepeners; that theme has continued throughout the night. There was a block buyer of a TU/FV/TY fly ($958K, evenly weighted buying the wings) early in the session, while better selling of gamma via Treasury future options was an early theme that continued through the night. Locally, JGBs opened under pressure ahead of tomorrow’s 30y issuance by the MoF; eventually JGBs clawed back to close largely unchanged, with JGB 10s actually 1 bp better on the session, but it feels very heavy in that market. Aussie rates bounced after getting torn apart the other night, just repricing post the US rally yesterday in a relatively quiet session. Asian equities closed lower after yesterday’s US rout, but traded firmer on the whispers about a US/China deal.

Into the European open, risk took a break as Reuters reported that China’s foreign ministry (no name) said that China refuses to set a deadline for a deal with the US, a clear slap at the US’s insistence on 15 December date, while making thinly-veiled threat to US after passage of further measures aimed at harming financial standing of Chinese rulers (“if you undermine China’s interests, you will be hit back”). Treasuries actually bounced all the way to unchanged before coming under pressure on better revisions to EUR Service PMI (51.9 from original 51.5) and UK Service PMI (49.3 vs 48.6 originally). However, the big driver was a Bloomberg story that hit at 4:08 AM ET ( https://blinks.bloomberg.com/news/stories/Q1ZJYXDWLU6V ) , the headline “US, China Move Closer to Trade Deal Despite Heated Rhetoric.” Treasuries broke 3-4 bps on air and repriced at current levels. This would be funny if it weren’t so pathetic. Flows during the European session saw better hedge fund and levered buying into and through the European open, but better Asian real money selling of 5s and 7s after the Bloomberg story, along with better Asian central bank selling of spread product (including mortgages!!!); this is the first time they weren’t buyers in weeks and needs to be watched carefully over the next several sessions. European real money was a seller of 2s and 3s, while the RV interest in the ED steepeners was dented by the pressure on the front end of the Treasury curve. Asian lifer sold ultras (they had been small buyer over last week), but Japanese lifer added a few WN contracts as the US curve steepened. Locally, gilts saw RV selling to buy bunds on polls showing Labour continues to trail Conservatives, while hedge funds were better sellers of short sterling on lower rate cut odds by BoE. Bunds were under concession pressure early by dealers and RV community ahead of the 10y bund auction; when the auction went fine, RV covered in bunds and sold gilts, while UK real money added flatteners in bobl/bunds. European equities are better on the day, but far off their earlier highs.

Today’s US calendar includes ADP at 8:15 AM ET, followed by Markit PMI at 9:45 and ISM at 10 AM ET. Quarles appears before Congress to testify on supervision and regulation at 10 AM ET. There is no Treasury supply on tap today.

So there was a lot of gamma selling last night via exchange options. And the market makes healthy moves both ways every day since late last week; granted, we haven’t moved much in absolute terms since last Tuesday’s settle (we are basically there right now) but the intra-day moves have been painful and a sign of the real exposure and lack of commitment by the trading community this month. Open interest was off across the board yesterday in Treasuries. Supposed to view objectively and not interpret that sign, so read it as yesterday was a short-squeeze and market should reprice lower. Okay, but on Monday’s big down day, open interest was ALSO down across the board, meaning what? Weak commitment. Guess here is the risk is to move lower in yield as there is far greater risk to rally than pullback in rate space. You are not supposed to be short gamma here, and if you have exposure to rally, you better have enough gamma on. Like the idea of synthetic call structures in 10y tails or FV on the exchange. You need two-month expiry OTC but can do a FVG structure at the exchange (51 days, ex 1/24/20). As for choice today in TYH, let’s call the range at 129-31 to 129-12, with 0% conviction today. Support comes in at 129-21 (pivot, o/n low), 129-12 level that fills single prints from yesterday, 129-08, 129-04/03, 128-26+; resistance comes in at the aforementioned 129-31 level, 130-03+/04+ (overnight high, yesterday’s high, profile resistance), 130-10+, 130-16+/17+, 130-31+. All right enough of this already….

Have a good hump day,
mjc