Where to start today? This is getting a bit more interesting as the punch bowl continues to leak (BoE hiked 25 bps to .75% as expected), and early signs are clearly materializing that much of the world is not ready to fight for fewer seats. As of 8 AM ET, Treasuries are 1.5 to 2 bps lower in yield, led by the belly, while US stock futures are down just over .5% ahead of the cash open.
After some aggressive block sales in the last few minutes of NY trading yesterday ($1MM of DV01 between 7y and 30y sectors) took Treasuries out on their lows at 5 PM ET, trading resumed in Asia on those softer levels, eventually pressured slightly lower when JGBs gapped lower on their open with 10y yields reaching .145% after the open. Just goes to show you: tell a trader you are putting in a silly level, say .20%, and watch the market go find it…. Some RV short covering ahead of the JGB 10y auction took the sector off the lows, but the auction was soft even at elevated levels, leaving one more chance for accounts to buy better levels, with Japanese corporates and banks using the last back up to lift 10s, 20s, and 30s as JGBs eventually closed slightly better, down 1 bps in yield across the curve (.12% for 10y JGB), aided by the BoJ doing an unscheduled operation of JPY 400BN purchases in the 5y and 10y sector. Aussie 10s repriced 5 bps higher in yield on the back of yesterday’s Treasury performance and a paucity of real money interest given the recent performance of the AUD. As for Treasuries, flows were mixed: better real money buying of 10s and 30s after Tokyo lunch which followed better Asian real money selling of 5s early and bank paying in USD 5y and 7y swaps throughout the session. Asian equity weakness eventually inspired some small short covering by levered types into the European open. Asian stocks were a sea of red, some a bit more meaningful as Chinese shares closed down over 2%, the NIKKEI was off 1%, and rest of Asia was down .75% to 1.5%.
Europe was a bit quieter to open, with chunky Euro government supply and the BoE on tap. It didn’t take long for the market to begin backing up though, even amidst the risk off sentiments from Asia, as macro fund wasted little time adding EUR 5s10s flattener in swap space, RV account sold BTPs (more on that later), real money lifted buxl and ultra gilts. Data took a back seat to supply and the BoE, with better concession building early morning in Europe taking European debt lower and Treasuries along for the ride. Treasury volumes stayed light, with mediocre-at-best supply results taking European debt to its lows and US back toward opening levels from the Asian session. The French OAT 11y and 13y supply found decent demand while the 18y struggled, with pricing on all three tranches rather soft. Spanish 2y results were soft, 5y supply was okay, and 10y supply saw a small tail. All in all, supply was enough of a disappointment to bring out better dealer and hedge fund selling as shorts were easily able to cover without having to lift. Shortly after the auctions, BTPs came seriously unhinged, with aggressive block selling and outright bank selling; there were stories about solvency issues as Italian banks dropped a quick 2.5%, while selling in BTPs picked up. Then at 5:30 AM ET, Reuters headlines reported China was preparing further retaliation on tariffs (this is NOT news, it hits every day around this time!!), further denting risk sentiment. In the hour leading up to the BoE announcement, we saw all buying in core FI markets: levered accounts covered in the belly of US and Germany, banks bought bunds against their peripherals, macro account added more 5s10s flatteners in Germany (in cash this time, not swaps), real money lifted ultra gilts and US 30s. The BoE announcement was really in line with expectations, story line being a 25 bps hike to .75% for base rate, the only minor hawkish note being a 9-0 vote instead of 8-1, but gilts and sterling barely budged. Markets soon went back to the risk trade, which ironically the BoE hike will only add to as more punch leaves the bowl, with a block buyer of $350K of DV01 in 5y sector (+7500 FVU for 113-03.75 at 7:19 AM ET) and better levered account covering in FVU and TYU contracts.
Today’s calendar includes weekly claims data at 8:30 AM ET, with factory orders and durables at 10 AM. Then we will set about avoiding the risk off trap and setting up for tomorrow’s NFP report to end this long week.
Well, we got 3.01%+ yesterday in cash 10s which was kind of cool. Some would argue that’s enough, but it just feels like we can take a legitimate run at 3.05% in cash 10s and (dare I say??) 3.2% in cash 30s. This is all part of getting everything properly offside and maybe just maybe we get the number tomorrow that completes everything on the downside. Certainly has happened enough times before. Need to take some pressure off risk, but there is still ample time to do that during the day today; if you don’t halt today’s negativity, you run the risk of turning tomorrow into a nonevent, and that will just mess with everything. So, for choice today in TYU, call the range at 119-15 to 119-05. Resistance above 119-15 comes in at 119-21, 119-24, 119-30+, 120-02, 120-07+; support comes in at 119-08+, the aforementioned 119-05, 118-31+, 118-26+ (theoretical 3.05% cash 10s), 118-25, 118-18+. I don’t think one needs to add any vol today, unless you think we are in for a 2SD number tomorrow; otherwise you will be able to add more vol later in the day on Friday, and you better not get greedy for the weekend because we could easily get turned upside down before Monday arrives.
Have a good Thursday and good luck tomorrow morning….