USD Swaps: Long end pushes higher; Forward fatigue

Matrix 9 Nv 2020
While yields are well off the post-ISM highs, the curve flattened further as the long end rallied. The spread curve flattened along with the UST move

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  • Long end pushes higher; Forward fatigue

  • Flatter spot curves versus steeper forward curves – JP Morgan

  • New issues


    Long end pushes higher; Forward fatigue   

    The pop higher in yield this morning has almost eroded completely, with further flattening seen on the curve. The 10y note yield is last 4bps lower at 2.708% after hitting a high yield of 2.847% this morning.


    As for the curve, 5s30s is last 3.7bps narrower at 11.5bps while 2s10s is last 7bps flatter at -37bps. Equities ended with strong gains, led by higher earnings in the tech sector (DJIA +1.28%, S&P +1.79% and Nasdaq +2.59%). TIPS BEs widened in the belly and longer end by 1-3bps while the front end of the BE narrowed by around 2bps in the 2y as energy dropped (WTI -3.8%, Brent -3.5% and gasoline -4.5%)


    Looking at the past 36 hours, one source suggested that the last week’s push to lower rates as the market “bought into the narrative of a Fed pivot” caused the Fed to react and push back “by saying there still a long ways off the 2% inflation target.” And though the information was really “nothing new,” the Fed talk was enough to turn the tide, with illiquidity aiding the magnitude of the move, the trader added.


    Meanwhile, this afternoon, Minneapolis Fed President Kashkari (alternate) added his two cents, saying the Fed is “laser focused” on getting inflation down and said it was “very unlikely” that the Fed would cut rates next year.


    The swap spread curve flattened with front end spreads rebounding in a very choppy trade while longer end spreads narrowed, bucking the trend of widening versus the outperformance of the long end amid above average volumes. To one source, this price action of longer end narrowing despite the underlying flattening was an indication of some fatigue in the forwards “as the forward curve is already very steep.”   


    As for IG new issuance, $5.35bn priced in a much smaller volume day compared to the first tow days this week. The weekly IG new issuance total (ex-SSA) is now $35.9bn.  


    Currently, SOFR swaps 2s -2.875bps (+1.125bps), 3s -18.875bps (+0.5bps), 5s -24.5bps (+0.5bps), 7s -27.625bps (+0.625bps), 10s -21.375bps (unch), 20s -61.875bps (-0.625bps), 30s -56.625bps (-0.75bps).



    Flatter spot curves versus steeper forward curves – JP Morgan

    Analysts at JP Morgan believe that the theme of swap yield curve movements – that is, spot curves continuing to flatten (especially at the front end), and forward swap curves continuing to steepen – will persist. For instance, it notes that while “the 2s/10s spot swap curve is 5 bps flatter over the past two weeks…the 3y forward 2s/10s swap curve is 13bps steeper over the same period.”


    Looking at the bank’s unified empirical fair value model for spot and forward swap yield curves, JP Morgan finds that “(i) spot curves are more exposed to flattening on the back of an uptrend in the short rate, while (ii) forward curves are more prone to steepening on the back of a fall in forward hiking expectations as priced into the 1st/5th ED curve.”


    In the current cycle, JP Morgan is “relatively confident that the risks to the short rate remain biased higher, while being less sure of the outlook for the Eurodollar curve” and thus it favors “a weighted amount of spot curve flatteners against forward curve steepeners, where the weighting is designed to hedge out exposure to the Eurodollar curve” such as pairing 3y forward 5s/10s swap yield curve steepeners, with 25% of the risk in 3-month forward 5s/30s flatteners- that preserves “exposure to a rising funds rate, while hedging exposure to the Eurodollar curve.”



    New issues


    • Meta Platforms will meet investors Aug 3 for a possible inaugural bond issue. Leads are Barclays, BofA, JPM and MS.


    • ArcelorMittal is preparing a USD 5y. Leads Citi, CA, GS, JPM and Mizuho. Baa3/BBB-.


    • HK’s Johnson Electric plans a USD bond via Citi, HSBC, JPM and StanChart. Baa1.


    • Synovus has mandated MS and GS for a series of investor calls ahead of a potential USD denominated issuance.  


    • Ashtead (Baa3/BBB-/BBB) has mandated BofA, Citi and JPM for a series of investor calls starting today ahead of a potential USD denominated issuance.


    • KeyBank launched a $2bn 2-part ($1.25bn 3y and $750m 10y). Leads KeyBank, BofA, GS, JPM and MS. Baa1/BBB+/BBB+. +112.5bps and +220bps.


    • DTE Energy priced a $1.3bn 2y. Leads WFS, Barclays and JPM. Baa2/BBB. +112.5bps.


    • Westpac priced a $1bn 11y NC10 Tier 2 sub. Leads BofA, Citi, MS and Westpac. Baa1/BBB+. +268bps.


    • PACCAR Financial priced an upsized $600m 3y. Leads JPM, MUFG and WFC. A1/A+. +52bps.


    • Williams Co. priced a $1.75bn 2-part ($1bn 10y and $750m 30y). Leads BofA, Citi, PNC and Scotia. Baa2/BBB. +195bps and +230bps.