Calm belies; Meta; NFP ahead
For the first time this week, the rates markets did decent imitation of a lackluster summer session, with yields bouncing around in a tight range. The 10y note yield is last 2bps lower at 2.685% while the curve has steepened back in 5s30s (+7.3bps to +19.2bps) after more than 20bps of flattening earlier this week. Equities are seeing small moves into the close (DJIA -0.22%, S&P -0.10% and Nasdaq +0.37%). The IG supply side was active, as a $10bn 4-part inaugural issuance from Meta headlined a busy slate in IG.
Amid today’s relative calm, sources were quick to point out that moments such as these in the markets have inevitably not lasted. “I think the biggest lie in markets this year has been ‘it will start to slow down next week,’” remarked one tired trader today. Indeed, the first week of August has been anything but slow up until today’s session.
Ahead - although NFP tomorrow is not expected to generate the kind of fireworks other data has provided (e.g. CPI) - sources say that it will be an illiquid summer Friday, with some looking to hit the exits early. Thus, the potential for further moves exacerbated by lack of participation remains high, some judge.
Meanwhile, today saw more Fed speak, as Cleveland Fed President Mester (non-voter) saw rates “going a bit above 4%” and said that “we will need to raise interest rates and then hold them there for a while.” Mester also stated that 75bps in September would not be “unreasonable” but that it could “very well be” 50bps. Ahead of payrolls tomorrow, Mester saw “only nascent signs” of labor softness and instead found the labor markets “still quite strong.”
As for IG new issuance, Meta was the dominant issuer, launching a mammoth $10bn 4-part, which saw final pricing tighten around 15bps from initial price talk. In addition, larger Yankee FIG issuance came from HSBC ($4.75bn 2-part) and Lloyds (a $2.5bn 2-part). As for swaps, swap spreads ended off the earlier intraday tights amid mixed volumes, with the 3y, 5y and 10y seeing above average volumes.
Currently, SOFR swaps 2s -3.25bps (-0.5bps), 3s -19.5bps (-1.25bps), 5s -24.625bps (-0.25bps), 7s -27.5bps (unch), 10s -22.5bps (-1bps), 20s -61.875bps (unch), 30s -57.5bps (-1.25bps).
Risky assets may decouple vs. 5y5y RYs – Deutsche
Since the beginning of March, analysts at Deutsche highlight that the 5y5y real rate “has risen by about 150bp” and “the sheer intensity of that, magnitude, and the speed of that selloff emerged as a power which overwhelmed all other factors.” Thus, when it comes to risk assets, Deutsche believes “it appears as if everything has been trading off of real rates” and furthermore, “it is precisely the anticipation of their continued rise that risk assets see as toxic and which has caused them to move in lockstep with real rates.”
“The difference between present and past interactions of the Fed and risk assets is that in this cycle the Fed is unlikely to relent as they did in late 2018” and thus “in the light of an urgency to fight the rising inflation, they will have higher tolerance for tighter financial conditions,” Deutsche suggests.
With this backdrop, “while it is likely that the long end of the real curve would not move significantly higher, given the steep front end (real Fed funds are still deep in the negative territory), one should expect additional rise of real Fed funds and possible further flattening of this sector due to future rate hikes, which could lead to additional inversion of the curve,” the bank argues.
As a result, “this would continue to have an impact on the economy and through that channel also affect performance of risk” and thus “as the long end of the real curve stabilizes around these levels, risk assets could begin to slowly decouple from long real rates,” Deutsche says.
- ArcelorMittal is preparing a USD 5y. Leads Citi, CA, GS, JPM and Mizuho. Baa3/BBB-.
- Meta Platforms launched $10bn 4-part ($2.75bn 5y, $3bn 10y, $2.75bn 30y and $1.5bn 40y). Leads Barclays, BofA, JPM and MS. A1/AA-. +75bps, +115bps, +145bps and +160bps.
- Citizens Bank launched an $800m 6y NC5 fixed to FRN. Leads Barclays, CS, JPM and MS. Baa1/A-. +180bps.
- Ashtead launched a $750m 10y. Leads BofA, Citi and JPM. Baa3/BBB-/BBB. Price talk +295bps.
- HSBC launched a $4.75bn 2-part ($2.25bn 6y NC5 fixed to FRN and $2.5bn 11y NC10 fixed to FRN). Self-led. A3/A-. +245bps and +275bps.
- Lloyds Group launched a $2.5bn 2-part ($1.25bn 4y NC3 fixed and $1.25bn 11y NC10 fixed). Leads Citi, Lloyds, Scotia and TD on 4y NC3. Leads Citi, GS, Lloyds, TD and WFS on 11y NC10. A3/BBB+. +155bps and +230bps.
- Standard Chartered launched a $1.25bn perpNC5.5 AT1. Leads Barclays, Citi, GS, SocGen and StanChart. Ba1/BB-/BBB-. 7.75%.
- Synovus priced a $350 3y fixed. Leads MS and GS. BBB-/BBB. Price talk +225bps.
- ONE Gas priced a $300m 10y. Leads TSI, RBCCM, WFC. A3/BBB+. +165bps.
- Waste Connections priced an upsized $750m long 10y. Leads BofA, JPM, MUFG and WFC. Baa2/BBB+. +153bps. Upsized from $500m.
- HK’s Johnson Electric has delayed plans for a USD bond via Citi, HSBC, JPM and StanChart due to market conditions, sources report. Baa1.