Markets have traded better to risk since mid-day yesterday in the US, effectively left to asset reallocation to risk once rest of world stepped away for the day. That theme has largely continued overnight, although volumes have slowed from earlier this week amid slightly lesser volatility. As of 8:15 AM ET, Treasuries are 3 bps worse than their 3 PM marks from Wednesday but flat to their 5 PM marks while equity futures are marginally higher ahead of the cash open.
The Asian session opened quietly but Japanese real money paying in USD 10y swaps and Japanese bank selling of UST 5s and 7s quickly took us through the late session lows from Wednesday. After Tokyo lunch, Treasuries regained the lower end of yesterday’s session on some Asian asset manager buying in 30s for month end, along with Asian bank buying of 5s outright and receiving in USD 5s10s in swaps, while a hedge fund was a payer in the long end of USD curve. Kiwi rates were the story during the Asian session as they backed up 6 bps in yield after making new all-time lows yesterday: the budget released yesterday showed a larger than expected jump in the deficit and the plan is for greater long-end issuance to cover the funding gap. Aussie 10s backed up 5 bps in sympathy with Treasuries and Kiwi rates, while even JGBs backed up (okay, only 1.5 bps) on some domestic profit taking after the big run up and huge jump in open interest for JBM9 futures the last two sessions. As for equities, they were mixed but stable after yesterday’s mixed US performance, with larger bourses (NIKKEI, Chinese indices, Hang Seng, ASX) all down between .25% and .50%, while smaller risk markets were slightly better bid.
The European session saw lighter volume but was a bit more volatile than the Asian session this day. The theme was soft data in Spain (both CPI and retail sales were weak) and decent demand for Italian BTPs at auction that helped peripherals tighten to core in general risk on session. Treasuries saw unwinds of bearish positions via sales in TYN and TYU puts 12-20 bps out of the money; there was RV buying of FVN puts covered against FVU futures. There was decent two-way flow in the front end, with central banks selling 2s, macro account covering shorts in 2s; central banks were again buyers of spread product, today more in the European session than of late. Comments from Chinese Ministry of Commerce (nothing new, mostly saying US must act in real negotiations) received a lot of press attention but markets largely ignored. Bunds have seen better selling first to add concession for supply, then after the BTP supply against buying in Italy. BTP auctions saw strong bidding for 5s, 7s, and 6y CCT, but only average demand for 10y supply; this is all against the backdrop of a nice backup outright and on spread in BTPs this week. SPGs saw good domestic fund and real money selling before data, only to see SPGs rally after soft reports. Italy is 4 bps tighter to bunds currently, while rest of peripherals are 1-2 bps tighter. Gilts have put in a quiet session, underpinned by the political uncertainty of the Union, with front end being place where hedge funds are most comfortable expressing any bearish views as curve flattens there. European equities are marginally higher in the risk on environment.
Big data day in the US, with revision to GDP, trade balance, and claims at 8:30 AM ET, followed by pending home sales at 10 AM. Clarida speaks to the Economics Club of NYC at noon ET. And supply for the month is done.
Number in couple minutes, so let’s keep this short. For choice today in TYM, let’s call the range at 125-29 to 125-09 (overnight low was 125-06+). This more hunch than anything else so be very careful. Support in TYM comes in at 125-14, 125-09, 125-07, 125-03+, 125-01. Resistance comes in at 125-19+, get through there early today and we WILL tag 125-29 at a minimum; fail there and it’s testing 125-09. Month end tomorrow shows Treasuries extending .11 years, and tomorrow is First Notice Day for Treasury futures.
Here comes the data….have a great Thursday,
mjc