Relief at yesterday’s CPI data has extended into today's session with yields at the front of the UST curve 4-5bps lower alongside similar gains for EDs ahead of the PPI and initial claims data. 2s/10s has bull-steepened by a couple of bps to -41bps with the 10y note at 2.75% (-2bps) and 10s/30s also +2bps at 27.6bps ahead of the $21bn 30y auction. In the background, S&P futures are +0.3% and WTI is a dollar stronger with TIPS breakevens mostly 0-1bps softer.
Meanwhile swap spreads are slightly better bid with 2s at -1.75bps (+0.25), 5s at -25.00bps (unch), 10s at -23.25bps and 30s at -58.75bps (+0.25) in below-average SOFR volumes.
Elsewhere, rising swap rates and high (cross-asset) delivered volatility in 2022 have led to concern about margin calls and the consequent need for end-users with OTM receive swap positions, struck when rates were much lower, to raise liquidity. For example, USD 10y LIBOR swaps are around 2.8% today but were below there from early 2019 to early 2022, and again from early 2014 to early 2018.
Research from Barclays this week entitled ‘Margin Shock’ looks at the role of CCPs rather than end-users in potentially pulling liquidity from the system, through shifting their cash piles to the safety of the Fed’s balance sheet when things get dicey. The bank explains:
- “(CCP) margin demands increased last March but were smaller than in March 2020. But central clearing platforms’ behavior was similar in both shocks - they retreated to the safety of the Fed’s balance sheet. This tendency is growing globally and could amplify future funding shocks created from CCP margin demands.”
“Since the pandemic, CCPs have increased their initial margin (IM) demands. IM held by global CCPs has increased by 64% since December 2019. Global CCPs keep more of the IM they collect from members in cash; and a growing portion is held at central banks. We estimate that US CCPs keep about $160bn in IM cash at the Fed.”
“Following the Ukraine invasion, US CCPs raised IM by nearly 10%. While large, this increase was smaller than the increase in IM demanded at the start of COVID. And while this did not precipitate a “Lehman moment” in funding markets, US CCPs moved defensively to protect their liquidity. They shifted half of the additional IM collected in Q1 22 to the Fed’s balance sheet just as in Q1 20.”
“Given the global trends in IM management and the increasing interest in shifting more activity onto CCPs, we suspect that future margin shocks are more likely to become funding shocks. But adjusting the remuneration rate on CCP balances at the Fed to coax more funding into repo and bank deposits may prove complicated and ultimately unsuccessful in a crisis.”
Callables and Formosas: BMO 30y NC5
- Bank of Montreal sold a $80m 30y NC5 zero coupon callable (non-Formosa). The EMTN matures Aug 2052, is callable annually from Aug 2027 and has an estimated IRR of 4.85% coupon. Puttable in Feb 2023. Self-led and announced Aug 10.
- National Rural Utilities yesterday priced a $400m 10y Sustainability bond. Leads are JPM, Mizuho, MUFG and TSI. A1/A-. +140bps.