Twisted: The market was dragged lower as trade worries over the FOMC and supply, with the long end getting hit as players are banking on no serious change out of the Fed tomorrow. Trade is also anticipating new, record levels of issuance to go off next week. Global supply is weighing on trade with size expected to be on the high end and looking to get in ahead of an actual signal form the Fed that rates will eventually be raised while the jobs report sits at the end of the week. The session saw back-and-forth batches of size on the runs lower. The day ahead has some relevant data ahead of the FOMC statement, but unless something misses hard, it should have little effect on trade and the move to a steeper curve should remain dominant. As for the supply announcement Wrightson ICAP sees the offerings bumped up by a billion apiece, to $40B 3-yrs, $24B 10-yrs and $16B 30s, according to WSJ, while others are expecting a total closer to $83B, either way they are expected move out to a 30-yr TIPS addition to replace the 20-yr TIPS. The curve was blown to the steepest levels in 2-months with the 2-10-yr yield spread running to just shy of 257. The dollar was leaning generally higher in light of assorted risk coverage trade as the index was able to hold better near 76.30 while keeping the euro trapped near 1.47 and the yen 90.30. The day ahead has the ADP payrolls guesstimate (8:15), ISM services (8:30), the refunding announcement (9) and the FOMC (14:15).

Issues: IBM launched $750M 2-yr floaters and $1.25B 3.5-yrs

Back Off: The dollar was brought back down with the index back to the sticky 76.30 after its early run to 76.80 while retaining some gains on the euro and getting stalled on the yen near the 90.30 level. The euro was battling to hold over the 1.47 handle late while also grinding back against the yen to hang near 133.00 per from near 132.00. On the big red letter day in gold, WSJ notes India's buying from the IMF was done from Oct 19 to 30 at near record high prices as central banks are looking to diversify. Some note gold is also getting some cyclical year-end buying and basic, black-box, technical action. Another input is that if, somehow, tomorrow the FOMC does anything major in the statement there will be a rush to safety and inflation cover (although any changes will be cause for at least a brief explosion in trade). Crude was able to pull better to settle 79.60 (+1.47) as demand expectations were fueled. Trade should, should, chill some with all the central bank activity over the next few days, with so many moving parts in play, all bets are off.

Dragging: The market remains under water with the yield on the 10-yr having tagged the 3.486% yield without much trouble as trade slows after a low end flurry of activity. The curve trade could take the 2-10-yr yield spread to 257.4. There is little left to do but watch stocks or stay out of the way. Orftech's Steve Orfanos this morning noted on the 30-yr futures "the short-term trend is neutral, while the intermediate and long-term trends remain bullish. Keep in mind it will take a move and settlement above 120-16 to confirm a bullish short-term bias. Today, look for more range trading as the USZ should trade between 119-13/11 and at least 120-16. If the lower level is broken, the Bond should test and hold above 119-01/00. Support can be found at 119-12, 119-01, 118-26... nothing significant until 115-13. Resistance should be met at 120-16, 120-24/25. On the 10-yr notes "to confirm a bullish outlook the TYZ needs to extend its gains above 118-27 and 119-01. Until then the Ten-year should consolidate and trade between 118-04 and either 118-27 or 119-01...support 117-25"

 

Beat Down: Bonds are sliding further as stocks try to pull back from worse levels and the market thinned ahead of the FOMC, with the 30-yr yield looking for near 4.36%. Treasuries fell apart heading into mid-day with the long bond leading lower with gold going ballistic and as players square-up the past week’s positioning and spread trades are reversed in front of this week’s hefty event risk. The market is looking out to the FOMC statement tomorrow along with the supply announcement for the 3-10-and-30-yr auction to hit next week. Supply in general is expected to remain at record levels and while the majority of recent offerings have gone well enough, but players wonder when the market will say “enough,” especially regarding longer dated issues at historic low rates. The market is also seeing some going sidelined as even as the FOMC will likely produce little in the way of statement changes (aside from numbers and technical factors regarding their buyback operations). The market is looking to swallow a solid run of corporate offerings with issuance expected to ramp up as operations try to lead the Fed. The market is weighing the run on gold as it reaches for new records as helping fan concerns over inflation although some call it a largely technical run. The curve was swung well steeper, to levels last seen early September with the 2-10-yr yield spread running 254.9. The dollar was making a strong showing early but was flipped back on the gold move to back off to 76.40 from 76.80 with the euro pushing back from a month low, taking aim at 1.47, but failing to take it out. The yen was giving up near 90.60 to the buck, but has come back to stall near 90.30 while seeing a brief improvement on the euro.

Bills: Treasury's $28B 4-wks draw 0.035% with a 4.35 cover and 43.2% indirect bidder take

Clocked: Bonds continue to get dragged lower with the long bond leading as gold went flying and markets were generally spooked. The chatter over rate hikes out of the OMB on deficits forcing up rates helps weigh. Reuters reports [Peter Orszag] also cautioned that the current situation of low rates, despite the record deficit, was "a product of the extraordinary economic environment in which we currently find ourselves" that would likely not last as the economic recovery gathered steam. "It is at this point that we are likely to observe a rise in interest rates, an increase in borrowing from abroad, or some combination thereof due to the deficits," Orszag said.

Issues: IBM to sell a minimum $500M 2-yr floaters and 3-yrs

Diageo to sell $500M 5-yrs-Reuters

Yale to sell $500M 5-yrs

 

Pushing Back: The dollar had been holding better on the euro and yen before recently getting hit, as gold took off and the buck was twisted back on offer. The index was up 2.5% from recent lows but has been dunked from near 76.80 back off to 76.44, while treasuries got knocked of to new lows, with inflation sensitive long bond leading. The euro had been dropped off to early October levels, while sliding to get just 131.70 yen from near 134.50. Technical trade helped propel gold through to record highs on some speculation that after India paid up for its planned chunk of the metal from the IMF, increases expectations that China may be coming in for a large buy as well. The metal ran to trade 1081, jumping 2.4% from early lows, now 1079.10 (+19.57). Crude has been backing off after a push to near 78.50, now 77.92 (-0.21).

Quiet: Trade is sliding further in quiet activity with the 10-yr holding near the 3.4% yield. The curve has been slanted back steeper with the 2-10-yr yield spread running 251.9. The market will be looking for items to trade off the remainder of the day, but consolidation into tomorrow's FOMC is most likely. The 10-yr may well get stuck between 3.375% and 3.425%.

Waiting on the Fed: Treasuries are retaining modest gains with the 10-yr working near the 3.4% yield level. There is little to work with here outside of ongoing negative banking news which is helping keep a bid under prices, while ongoing, rampant speculation on what will come out of the FOMC tomorrow will dominate news. The consensus is that it's too early to toy with the language of the statement in terms of the removal of the "extended period" parameter, and at most will offer up a single tweak if only to let the market know they are doing something. There may also be straight updates on the Fed's assorted mortgage and agancy related buybacks, but that's about it.

 

Clinging to Gains: Bonds have backed off of early gains seen on additional global banking woes that helped knock the 10-yr yield back off to a 2-wk low to tag 3.368%. The market will be hard pressed to hold the best levels without some additional big news, with supply sitting on prices and stocks trying to tick back. Sliding stocks has global bonds generally bid as banks continue to run into further troubles. Trade will glance at factory orders, while also eyeballing the vehicle sales, but the market has lost faith in the veracity of much of the data and every print remains at least somewhat suspect. The curve has been pushing to flat with the 2-10-yr yield spread at 250.1. The dollar has run-up to over 76.80 and up against the euro with the regional currency hitting 1.4625, levels last seen in early October. The yen has pulled back off early improvement on the buck on risk concerns while pulling back to its best levels since Friday on the euro. Treasury will sell $28B 4-wks while data offers just factory orders (10) with vehicle sales trickling in and the FOMC starts their deliberations with tomorrow's statement awaited.

Table of overnight activity in the financial markets.

Treasuries were stronger while equities look to give up gains seen yesterday. Possible catalysts for Treasuries' rise include UBS's worse-than-expected 3Q loss and the U.K. government's GBP31.2 bln injection of taxpayer money into RBS and Lloyds. September factory orders and auto sales are due at 10AM and 2PM, respectively. $28 bln in 4-week Bills will be auctioned today. The euro hit a 4-week low vs the dollar. The Australian dollar slid vs the dollar following its second rate raise in as many months. The 2-10-year yield spread is 249 vs yesterday afternoon's 250.5.

Pressured: The market had been led along lower by the long end with the day's data and global supply adding to drag. Trade was under pressure through the session as improved data surprised to the upside, made an attempt to get back some ground into mid-day before falling apart again late. The late part of the day saw the short end got caught in a range while the longer end leaned lower as stocks push back. The market has heaping mounds event risk on the calendar with auctions, announcements and central bank decisions on deck. The Australians will kick-start the policy action week, hiking rates while the FOMC, ECB and BOE will be on hold, although the Brits may add to their "quantitative easing" operations. The market may consolidate at lower levels in the run-up to the FOMC, (and Friday's payrolls) as players play caution with the shorter end seeing a bid while the week's data calendar is full of data that is expected to show general improvement. The curve was swung steeper with the 2-10-yr yield spread trading 250.5. The dollar was made an effort at better levels, but the index was unable to hold over 76.30 as data helped dampen the safety bid. The euro was able to regain ground on the buck and the yen, churning back off through the session in light trade. Tuesday offers just factory orders (10) with vehicle sales trickling in, while the Fed should remain muzzled ahead of the meeting.

Aiming Higher: The dollar has been backing off after running up to tag 76.41 before flipping back off to 76.21 as the euro pulls back in a late session squaring. The euro peaked on the buck and the yen following the early data and spent the remainder of the day churning back off from 1.4845 to bounce off of 1.4728 on the buck wile winding back to get 133.00 yen. The yen ground back from an early 90.69 on the dollar before stalling mid-say near 90.30. Gold was boosted as the dollar slid with spot running 1056.20 (+10.90) while crude was boosted on increased demand expectations to settle 78.13 (+1.13). The market will likely consolidate ahead of assorted central bank meetings and minutes throughout the week.

Treasuries are lower following a slight rebound in equities. Data scheduled later includes construction spending, pending home sales as well as data from the Institute of Supply Management. $29 bln of 4-week Bills and $30 bln in 6-month Bills will be auctioned today. The dollar index is lower while sterling broke five days of gains vs the euro after RBS said government discussions cold lead to asset sales not previously contemplated. The Australian dollar climbed after its Treasurer said the economy will grow faster than forecast. Its central bank is scheduled to meet tomorrow regarding rates. The 2-10-year yield spread is 250 vs 248.5 Friday afternoon.