OPTIONS: Dovish Rate Structures Continue To Stand Out

Monday's Europe rates/bond options flow included:

• RX Wk2 124.5p, bought for 1 in 4k
• RXG6 127^ vs RX Wk2 126/128^^ x2, sold the Straddle at 90 in 1.5kx3k
• RXH6 126.50p, sold at 51.5 in 9.2k
• RXH6 128/129cs vs 126/125ps, bought the cs for 6 in 1k
• RXH6 129/127ps, bought for 127 in 2k (ref 127.27)
• ERM6 98.12/98.25/98.37c fly, bought for 0.75 in 5k
• ERZ6 97.93/98.43 call spread paper paid 8.25 on 5K.
• 0RH6 97.56/98.06^^, sold at 3 in 5.5k
• SFIH6 96.35/96.25/96.15p fly, bought for 1.25 in 4k
• SFIZ6 96.90/97.00cs v 96.35/25ps, bought the cs for 0.25, 0.50 and 0.75 in 20k total

European curves bull flattened Monday.

• Cash bonds posted a fairly indifferent start to the week's trade, in spite of weekend geopolitical volatility after the US's removal of the Venezuelan president.
• Early gains in core bonds on softer oil prices were tempered by a rise in equities/risk appetite and a rebound in oil, but ultimately yields resolved to the downside.
• A soft US ISM Manufacturing reading in mid-afternoon didn't have much immediate impact but help drag Treasury yields lower, helping EGBs and Gilts consolidate gains into the cash close.
• On the day, both the UK and German curves bull flattened, while periphery / semi-core EGB spreads tightened modestly.
• Tuesday's calendar highlight is flash December inflation data from Germany and France, both of which are expected to show some moderation - MNI's preview is here.

Closing Yields / 10-Yr EGB Spreads To Germany

• Germany: The 2-Yr yield is down 1.2bps at 2.127%, 5-Yr is down 2.3bps at 2.453%, 10-Yr is down 3bps at 2.87%, and 30-Yr is down 3.4bps at 3.507%.
• UK: The 2-Yr yield is down 1.5bps at 3.72%, 5-Yr is down 2.3bps at 3.938%, 10-Yr is down 3.1bps at 4.506%, and 30-Yr is down 2.7bps at 5.246%.
• Italian BTP spread down 1.4bps at 69.9bps / Spanish down 0.8bps at 43bps

• RES 4: 113-07   High Dec 3
• RES 3: 113-00+ 61.8% retracement of the Nov 25 - Dec 10 bear leg
• RES 2: 112-25+ high Dec 30 / 31 
• RES 1: 112-20   50 -day EMA
• PRICE:‌‌ 112-14+ @ 17:17 GMT Jan 5
• SUP 1: 112-01+/111-29 Low Dec 23 / 10 and the bear trigger
• SUP 2: 111-19   1.236 proj of the Oct 17 - Nov 5 - 25 price swing
• SUP 3: 111-11   1.382 proj of the Oct 17 - Nov 5 - 25 price swing 
• SUP 4: 111-00   Round number support 

Treasuries continue to trade above key support at 111-29, the Dec 10 low and a bear trigger. The trend theme remains bearish and a break of 111-29 would confirm a resumption of the bear cycle. This would open 111-19 initially, a Fibonacci projection. Key short-term resistance has been defined at 112-31, the Dec 18 high, where a break would undermine a bear theme and signal scope for a stronger recovery instead.