The TRÉAN Report by Matt Carinato

Friday, September 13, 2024

Well, at least it's Friday and we can't end this week fast enough. But something does not feel right out there. Ahead of the Chicago open, Treasuries are 1-4 bps lower in yield, well off the best levels of the night but continuing an impressive bull steepening that began late yesterday. US equity index futures trade marginally firmer ahead of data and the cash open.

Let's start all nice and calm and actually look at implied breakevens for today. You'll see why in a second:

*US Classic: 3.23 bps
*UXY Ultra 10: 3.22 bps
*TY: 3.57 bps
*FV: 4.02 bps

So herein lies the problem: the breakevens for this day are trying to lull us all to sleep. They are pedestrian, largely around normal for a "not important" Friday. We continue to talk ourselves into a recession and rate cuts by the Fed, so it just makes it not very fun to trade and breakevens drift lower. Remember the sell off yesterday after the "strong" PPI data??? Well it wasn't really that strong, but it's not moving toward 2%, but who cares? The market just waited until WSJ's Timiraos writes a piece that many believe(d) was a Fed plant, during the Blackout period no less, and away we went late yesterday....

We went from 3% chance of a 50 bps cut at the "25 bps is it" extreme yesterday to our current 45% chance of 50 bps. Oh, and Bill Dudley made his way out of mothballs to speak in Asia and opine that he sees a "strong case for 50 bps" next week. 2y notes took out yesterday's late session highs on the open, with steepeners officially back in vogue. What could possibly go wrong???

There was good buying from the outset in Asia, primarily concentrated in the front end and belly. What little buying that came through in 10s and 30s was more than offset by the selling produced by accounts adding/ hedging via steepeners. It was the most active Asian session of the week. There was another bout of short covering after Europe opened, this time more in 10s that helped flatten the curve until closer to NY arrival , when we again saw front end demand outright and on the curve, more focused in swaps as real money was active first thing this morning. As has been the case lately, fast money then stepped in to sell 10s out to 30s, both cash and futures.

Look, your breakevens are so small it won't take much to catch people off guard. Gamma is bid right now, and it's not JUST because we are steepening; people are trying to quietly manage their risk ahead of Wednesday and they aren't getting it done yet. One would be well served to manage that gamma short exposure for today. Today just has that feeling and it is Friday the 13th anyhow Jason. Just saying....

So you have nothing but inflation numbers today: import/export prices at 8:30 and then Michigan at 10 AM. Says here that whatever the numbers are, the risk is for a rally to 3.58/3.55% today in 10s. That will leave a mark, the pain coming if we take out 3.62%. If you drift back to 3.70% then there's a chance today is over, except for the gamma buying that will occur in the afternoon. Just be careful out there and good luck.

Have a great weekend,

mjc

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