USDi: Fed threads its 75bps hike to the delight of BEs

Financial data 24 Nov 2021
BEs were lifted into and out of today’s 75bps rate hike by the Fed in a broad multi-asset advance.

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  • Fed threads its 75bps hike to the delight of BEs

  • Barclays: Less than meets the iota 



    Click here for SDR inflation swap trade


    Fed threads its 75bps hike to the delight of BEs

    Chair Powell and his merry band of Fed official managed to threat the needle today, unanimously raising rates by 75bps as widely expected in its steadfast fight against inflation while also staying open to tapping on the brake if necessary.


    Indeed, in the Q&A, Powell saw it “likely appropriate to slow increases at some point” and said “another unusually large increase” in rates would be data dependent. Powell added the Fed would offer “less clear guidance” and the Fed would take it “meeting by meeting” but saw “significant additional tightening in the pipeline” while saying that the economy is not currently in a recession.  And shining a little light on the TIPS market, Powell also stated that the recent compression in breakevens was “a good thing”.


    Post-FOMC, the U.S. inflation asset class - already giddy from a multi-asset pre-FOMC rush – got another dose of adrenaline along with the broader risk tone.  And with nominals, energy and the major domestic equity indices all heading higher into the today’s close, TIPS breakevens and inflation swaps are coming along for the ride with dealers marking he inflation curves roughly 5-8bps higher in the 2y-30y sector.


    Flow-wise, inflation swap trades thus far on the SDR today included 1y ZC swaps at 382.5bps, 2y ZC swaps at 333.5bps, 3y ZC swaps at 309.5bps and 314.625bps, 4y ZC swaps at 294bps and 395.75bps, 5y ZC swaps at 285.25bps, 287.125bps and 289.25bps, 10y ZC swaps at 268.75bps  268.5bps, 269.125bps and 269.25bps, and 30y ZC swaps at 242.875bps and 248bps.…(for more trades, see Total Derivatives SDR).


    Lastly, Barclays finds that “outflows from major TIPS ETFs remain thematic of late, with outflows larger than $100mn have occurred in three straight days.” 


    Heading into the close, the 2y breakeven is going out at 314.875bps (+5.875bps), 5y at 267.375bps (+8.25bps), 10y at 244.75bps (+8.75bps) and 30y at 225.5bps (+6.75bps).


    Barclays: Less than meets the iota

    Strategists at Barclays find that “since late June, the TIIFeb40s and TIIFeb41s have underperformed sharply in iota, especially in contrast to the TIIFeb42s and TIIFeb43s.”  For context, the bank explains that “the difference between the matched-maturity CPI basis for the TIIFeb40s/TIIFeb42s and TIIFeb41s/TIIFeb42s has blown out to the widest levels in years, even beyond levels during the hyper-illiquid dislocations in March 2020.”


    At first glance, this could theoretically offer an RV opportunity, though Barclays finds that deeper digging shows that there’s less than meets the eye to this development:


      ”Specifically, the iota widening has largely been driven by a sharp richening of the TIIFeb40s and TIIFeb41s’ nominal comparators, rather than anything TIPS specific. We can see a fork in Z-spreads in the 15-20y sector of the nominal UST curve, which is largely driven by whether each individual CUSIP will evolve into the cheapest-to-deliver for the classic bond Treasury futures contract – or not.


      “Moreover, the TIPS Z-spread ASW curve does not show any meaningful dislocation in the TIIFeb40s and TIIFeb41s, while in the TIPS Rich/Cheap Report of our latest Inflation-Linked Daily, the issues are categorized as rich to our Z-spread ASW curve. Therefore, on net, although the TIIFeb40s and TIIFeb41s present as cheap in iota, we see the underlying driver as being specific to the nominal legs, and since it is not obvious to us that the TIPS leg should richen as well in turn, we do not recommend fading the iota cheapening.”