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MNI US Morning FI Analysis: Risk Aversion Drives Curve Flattening

Fig 1. 50-Year Gilt Yield



Source: MNI, Bloomberg

US TSYS SUMMARY: Bull Flattening As Familiar Anxieties Re-Emerge

A familiar set of global concerns has boosted Tsys among other safe haven plays: COVID (lockdowns in Europe), Brexit (EU Summit getting underway shortly), and US fiscal (Mnuchin's comments Weds dashing most hopes of pre-election stimulus).

  • Tsy futures just below session highs, with Dec TYs up 5/32 at 139-12 (L: 139-06 / H: 139-13) - decent volume too, ~275k by 0630ET.
  • Textbook risk-off bull flattening as well: the 2-Yr yield is down 0.6bps at 0.133%, 5-Yr is down 1.3bps at 0.2913%, 10-Yr is down 2.8bps at 0.6975%, and 30-Yr is down 4.4bps at 1.4618%.
  • Earnings weighed on equities in Europe; in the US after Wednesday's mixed bag of financials earnings, we get Morgan Stanley today at 0730ET.
  • 0830ET sees most of the data slate: jobless claims, Philly Fed and Empire State mfg indices, and Sep import/export prices.
  • In Fed speakers we get Atl's Bostic at 0900ET, StL's Bullard at 1010ET, Dallas' Kaplan / VC Quarles (at separate events) at 1100ET, Richmond's Barkin at 1400ET, and Minn's Kashkari at 1700ET.
  • Trump / Biden election events will be eyed after hours.
  • $65B in 4-/8-week bill sales at 1130ET, and NY Fed buys ~$2.425B of 1-7.5Y TIPS.

BOND SUMMARY: EGB/GILT Curve Flattening

Core European govies have rallied this morning and curves have bull flattened as social restrictions across Europe continue to be tightened in response to rising coronavirus infections. Equities are lower across the board and the US dollar is on the front foot against G10 FX.
  • Gilts yields are 1-6bp lower and 2s30s is 5bp narrower.
  • Bunds have similarly traded firmer with cash yields at the longer end trading down 5bp.
  • OATs are only slighly lagging the bund rally. Last yields: 2-year -0.7219%, 5-year -0.6876%, 10-year -0.3422%, 30-year 0.3338%.
  • BTPs have sold off and the curve has bear steepened. Yields are 2-4bp higher on the day.
  • Supply this morning came from France (OATs, EUR7.2bn and Linkers, EUR1.0bn), Spain (Bono, EUR2.325bn and Ireland (Bills, EUR0.75bn).
  • Mirroring the tightening of social restrictions in Northern England, London now faces additional curbs from midnight on Friday.
  • The European data calendar was light again today. The final French CPI print for September was in line with the initial estimate.

DEBT SUPPLY

France Sells E7.24bn of M/T OATs Vs E6.5-7.5bn Target

  • E1.900bn of the 0.0% May-25 OAT: Average yield -0.70% (0.10%), bid-to-cover 1.72x (4.1x)
  • E3.155bn of the 0.0% Feb-26 OAT: Average yield -0.64% (-0.415%), bid-to-cover 1.72x (2.12x)
  • E2.185bn of the 2.75% Oct-27 OAT: Average yield -0.59% (-0.38%), bid-to-cover 1.54x (2.25x)

Ireland sells E0.7bn of 6-Month Bills

  • Average yield -0.58%, bid-to-cover 2.1x

OPTIONS

EURIBOR OPTIONS: Blue downside

3RZ0 100.37p, bought for 1.25 in 8,880 (ref 100.505, 10 del)

EURIBOR OPTIONS: Downside structure

ERZ0 100.50/100.37ps, bought for 1 in 4k

EGB OPTIONS: Bobl Call seller

OEZ0 135.50c, sold at 36.5 in 3.4k

Suggest profit taking

EURIBOR OPTIONS: More blue structure interest

More blue interest, and we have seen similar in Sterling and Eurodollar structures of late

  • 3RH1 100.25p, bought for 1.75 in 2k (ref 100.505)

TECHS

US 5YR FUTURE TECHS: (Z0) Extends This Week's Gains

  • RES 4: 126-006 76.4% retracement of the Sep 30 - Oct 7 sell-off
  • RES 3: 125-316 High Oct 5
  • RES 2: 125-30+ 61.8% retracement of the Sep 30 - Oct 7 sell-off
  • RES 1: 125-302 Intraday high
  • PRICE: 125-30 @ 11:13 BST Oct 15
  • SUP 1: 125-27 Low Oct 14
  • SUP 2: 125-23+ Low Oct 13
  • SUP 3: 125-202 Low Oct 7 and the bear trigger
  • SUP 4: 125-16+ 1.00 proj of Aug 4 - 13 sell-off from Sep 3 high

5yr futures have extended gains today and appear set to appreciate further. This week's rally marks a potential reversal of the recent decline between Sep 30 and Oct 7. Futures have traded through a resistance zone defined by the 20- and 50-day EMAs. A clear breach of this zone would strengthen a S/T bullish argument and open 125-316, Oct 5 high. Initial support is at 125-27, yesterday's low. The reversal trigger is at 125-202, Oct 7 low.

US 10Y FUTURE TECHS: ‌(Z0)‌ Bulls In Control ‌ ‌

  • RES 4: 139-26 High Sep 29 and a key resistance
  • RES 3: 139-25 High Oct 2
  • RES 2: 139-17 76.4% retracement of the Sep 29 - Oct 7 sell-off
  • RES 1: 139-13 Intraday high
  • PRICE: 139-12 @ 11:33 BST Oct 15
  • SUP 1: 139-04+ Low Oct 14
  • SUP 2: 138-28+ Low Oct 13
  • SUP 3: 138-20+ Low Oct 7 and the bull trigger
  • SUP 4: 138-18+ Low Aug 28 and the bear trigger

Treasuries remain firm following this week's gains and price is higher again today. This week's gains signal a likely reversal of the recent bearish theme and if correct, highlights scope for stronger S/T gains. Futures have traded through a band of resistance defined by the 20- and 50-day EMAs. A clear breach of these averages would strengthen a bullish argument and open 139-17 next, a retracement level. Initial support is at 139-04+

US 30Y TECHS: (Z0) Pressuring The EMA Resistance Zone

  • RES 4: 177-24 High Sep 4
  • RES 3: 177-14 High Sep 17 and a bull trigger
  • RES 2: 177-00 High Oct 2
  • RES 1: 176-09 Intraday high
  • PRICE: 176-00 @ 11:46 BST Oct 15
  • SUP 1: 175-01 Low Oct 14
  • SUP 2: 174.08 Low Oct 13
  • SUP 3: 173-10 Low Oct 7 and the bear trigger
  • SUP 4: 172-13 0.764 projection of Aug 6 - 28 decline from Sep 3 high

30yr futures are extending the recovery off the Oct 7 low of 173-10. This week's gains signal a reversal of the recent decline between Sep 29 and Oct 7. Futures have entered a band of resistance highlighted by the 20- and 50-day EMAs. Clearance of this zone would strengthen the current bullish theme and open 177-00, Oct 2 high. Note too that a trendline resistance drawn off the Aug 6 high has been probed. 175-01 is first support.


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