USD Swaps: Powell’s pain signals invert curve further

Crisis chart very red 26 May 2022
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Powell saw softer labor and growth in order to tame inflation. The curve inverted further as recession horizons were amplified as a result.

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  • Powell’s pain signals invert curve further

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    Powell’s pain signals invert curve further   

    The Fed raised by 75bps and increased rate projections to 4.4% by year’s end and 4.6% by end of 2023 – an increase of 100bps and 80bps compared to the June median levels. In addition, in the Q&A Powell said “high interest rates, slower growth and a softening labor market are all painful for the public that we serve, but they’re not as painful as failing to restore price stability and having to come back and do it down the road again.”

     

    With this, the USTs rocked more inverted due the increasing probability of recession. The 2y note yield did plunge right after the statement, with a high yield of 4.117% seen briefly, but is last 4.046% or 7.3bps higher. Meanwhile, the 5y is the pivot point at unchanged on the day while the 30y note yield is last 8.3bps lower at 3.492%. The 10y is last just above 3.50% at 3.518% or 5bps lower.

     

    2s10s USTs is 12bps lower at -52.8bps and 5s30s is 8.3bps flatter at -25.8bps. Equities closed down (DJIA -1.7%, S&P -1.24% and Nasdaq -1.79%), with mostly one-way traffic lower after the FOMC.

     

    Swap spreads have widened out in the front end 2y and 3y spreads. Meanwhile the 5y spread has continued to ratchet out incrementally wider by around 0.375bps, continuing a consecutive grind higher over the past six sessions. The rest of the belly - 7y and 10y - also saw modest moves. Further out, the whippy 20y was wider by 3bps at one point but is now last around 1.25bps wider. As for volumes, the wings saw the most activity.  

     

    Currently, SOFR swaps 2s 13.5bps (+2.125bps), 3s -7.8755bps (+1.125bps), 5s -18.25bps (+0.375bps), 7s -25.125bps (+0.375bps), 10s -21.5bps (unch), 20s -59bps (+1.375bps), 30s -58.75bps (+0.375bps).

     

     

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    • Rentenbank priced a $1.25bn 5y Global. Leads are BMO, Commerzbank , JPM and TD. Mid swaps +37bps.