Havens off highs but curve bull-flattens
Haven assets (if such things are possible in a nuclear conflict…) have shed some of the early gains made in the wake of President Vladimir Putin’s unsettling address to the Russian nation with the 5y Treasury back at 3.73% (-2bps) after testing 3.69% this morning, while the 30y is 3.54% (-3bps) as the curve bull-flattens ahead of the FOMC meeting. Risk assets are mixed with WTI up $1.7 and Dutch gas futures +6.5% but TIPS breakevens are little-changed and equities are equally sanguine with S&P futures +0.2% and even the Euro Stoxx +0.1%. In rates white EDs are 0-4bps lower but the reds and greens are up 1-2bps. And swap spreads are mostly tighter as issuance pauses for the Fed with 2s at 11.75bps (+0.50), 5s at -18.75bps (-0.25), 10s at -22.00bps (-0.50) and 30s at -59.50bps (-0.50) in above-average flows out to about the 7y bucket.
Risk assets can bounce if Fed meets expectations: Barclays
Writing before Putin’s (verbal) bombshell, macro analysts at Barclays were cautiously hopeful that risk assets would see a bounce heading out of the FOMC, spotting some positives in all the gloom and noting the high degree of hawkishness already priced into both Treasuries and risk assets. According to the bank, bright spots included:
- “The US jobs market has been remarkably resilient so far. Households and corporates entered 2022 in good health….Much of the bad news is now out, which reduces new downside tail risks…The US inflation narrative could improve (and) falling energy prices in US are likely to help consumer sentiment and spending”
However, there are obvious headwinds even before today’s nuclear threats including Barclays’ view that “both US and European earnings consensus are still too optimistic (and) US stocks also have room to de-rate” As for the FOMC, the bank expects the Fed to try to “repeat Jackson Hole” today:
- “It will hike 75bp this meeting; we believe 100bp is a step too far…The most important signals will be in the SEPs, which will now have the 2025 forecast. We expect the terminal rate to move up to 4-4.25% but not further. We do not feel that the last CPI report was worth an extra 50bp in the terminal rate. We also expect the Fed to show much higher U3 and 2% core PCE inflation for 2025. But the Fed’s terminal rate is likely to come in lower than market pricing.”
- “Medium term, we feel equities have room to de-rate, with 10y UST yields at 3.5%. And yet, for short-term investors, we now expect a tactical bounce in risk assets…In 2022, markets have rallied coming out of most FOMC meetings. Investors de-risk going into the meeting. Unless the meeting is a big hawkish surprise, investors often feel pressured to get back in”
“The chances of a hawkish Fed meeting relative to market pricing are unlikely, despite Fed intent. Markets price some chance of 100bp for September, and a 4.5% peak terminal rate. We expect 75bp, and a 4.1% terminal rate; while not actually dovish, this is lower than market pricing”
“2y UST yields are at almost 4%. While some cuts are priced into 2023, that would take fed funds down to 4%, a fairly high level. In other words, bond markets seem quite aggressively priced in our view for this Fed meeting.”
Callables and Formosas: Natixis 20y NC5
- Natixis sold a $80m 20y NC5 fixed callable Green Formosa. The EMTN matures Oct 2042, is callable every 5y from Oct 2027 and pays a 5.50% coupon. Leads are E.Sun, Cathay and Yuanta.
- Merrill Lynch sold a $15m 15y NC7 fixed callable (non-Formosa). The EMTN matures Sep 2037, is callable annually from Sep 2029 and pays a 5.52% coupon. Self-led.
New issues: Rentenbank, Citrix
- Rentenbank is preparing a USD 5y Global at swaps +37bps. Leads are BMO, Commerzbank , JPM and TD. Books above $1.95bn.
- Citrix yesterday priced its $4bn 6.5y NC3 senior secured bond (B2/B) at 83.561 to yield 10% and 625bps over Treasuries. Leads include CS, BofA, GS, Barclays, Citi, DB, KKR, Mizuho, MS and RBC.