USD Swaps: More flattening. Eurex confirms LIBOR plans; Fed reactions

Chart numbers candles 14 Jun 2022
EDs are lower and the UST curve is flatter as rate hikes are digested. Eurex sets out its LIBOR conversion plans. Brevan's gains extends.

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  • Post FOMC bear-flattening

  • Eurex Clearing confirms LIBOR conversion

  • Brevan gains in September after raising rats short, dollar long

  • FOMC: Banks adjust views after hawkish dot plots

  • Callables and Formosas: 15y NC1 approaches 6%

  • New issues: JBIC


    Post FOMC bear-flattening

    Treasuries are bear-flattening with white and red Eurodollars off the lows but still down a further 3-12bps overnight following BOJ intervention to support the yen around USD/JPY 145.8 and rate hikes by the SNB, Norges Bank and BOE. The latter was on the low side of expectations – the market had been pricing the risk of a 75bps move – but the sterling curve reacted negatively beyond the very front end of SONIA after the MPC voted to implement QT and confirmed that looming fiscal easing was yet to be incorporated into its thinking.


    UST yields are +3bps at the front end while the 30y is unchanged at 3.50%. In swaps, spreads are a tad tighter with 2s at 11.50bps (-2.0), 5s at -18.25bps (-0.25), 10s at -21.75bps (-0.25) and 30s at -59.00bps (-0.125) in above-par volumes led by the 10y bucket. S&P futures are just in the red at -0.1% after the index fell 1.7% yesterday. 


    Eurex Clearing confirms LIBOR conversion

    Eurex Clearing today confirmed its plans for converting cleared legacy LIBOR-based swaps, FRAs and basis trades to standard and liquid risk-free rate OIS trades before the fallback provisions are triggered (link).  Eurex intends to use the approach it previously applied to GBP, CHF, and JPY LIBOR for the upcoming USD LIBOR conversion. It plans to execute the conversion starting on Friday, 21 April 2023 and lasting over that weekend. CME and LCH have announced the same date for conversion – see Total Derivatives.


    Brevan gains in September

    Elsewhere, it seems that Brevan Howard’s decision to increase its rates short and its dollar long at the end of August continued to work for the Master Fund’s investors this month (Total Derivatives). The BH Macro feeder fund rose 2.04% in the month to September 16, taking the gain for the year to date to a decent 20.42%.


    FOMC: Banks adjust views after hawkish dot plots

  • Deutsche Bank: “The Committee’s hawkish signals were consistent with our expectation of a near-5% terminal rate by early-2023 that induces a recession by mid-year…The reaction function implicit in the SEP is slightly more dovish than market pricing. Over 23/24, the Fed is aiming for 1.7% real fed funds and 2.6% PCE inflation. The market is pricing a similar level of real rates but lower inflation. As a result, being long breakevens is arguably a better trade than being short the front-end. Alternatively, one can consider being long the term premium (defined as the 5s/10s slope beta hedged with a 20% short in the 2y), as it is already too low relative to  breakevens.”


  • Barclays: “In line with the SEPs, we revise our call for the funds rate to a 75bp hike in November (versus 50bp prior), followed by a 50bp increase in December (versus 25bp prior). This would bring the year-end fed funds target range to 4.25-4.50%.”


    “At the February 2023 meeting, we expect the FOMC to raise its policy rate one more time, by 25bp, pushing the target range to a cycle peak of 4.50-4.75%. We continue to think that the FOMC will cut its funds rate by 50bp in the latter portion of the year, with our outlook anticipating a rising unemployment rate, PCE price inflation descending into the low 2.0%s,and the economy experiencing meager growth. This path lifts the our estimate of the funds rate at end-2023 by 25bp, to a range of 4.00-4.25%.”


  • BNP Paribas: “Policymakers now see a terminal fed funds rate of 4.75%, but no recession over the forecast horizon. The Fed’s baseline now looks to be a fourth 75bps hike in November and a downshift to 50bps in December. We are adjusting our Fed and economic projections accordingly. We now see a terminal fed funds rate of 4.50% and as a result a weaker trajectory for growth and higher unemployment. Relative to the Fed, we expect a more austere outcome for growth and unemployment but also stickier inflation, necessitating fed funds remaining at a slightly lower peak for a considerably longer period of time.”


  • RBC: “With fewer visible bearish rate risks on the near-term horizon along with tighter financial conditions and a more hawkish Fed path, we think the market narrative will start to shift back to growth concerns and hard-landing risks.


    “We think this is likely to drive some consolidation of the massive two month selloff. However, we also think this will likely be a bull-flattening environment, ala late-June and July. Even at these seemingly stretched levels in curve, we think it will be difficult for markets to meaningfully challenge the Fed pricing in the front-end..It's tough to envision data turning quickly or severe enough to knock the Fed off of that path before it has already been delivered.


    “Cut pricing in 2023 is likely fairly sticky/range bound after the Fed’s verbal pushback over the last month. If the narrative  indeed moves back to a hard landing/risk-off as we expect, we think those concerns will be bad enough for longer-term rates to  rally, but not so much that markets start taking November/December hikes off the table or returning to 3+ 2023 cuts being priced in.”


    Callables and Formosas: 15y NC1 approaches 6%

    • Credit Agricole sold a $15m 15y NC1 fixed callable (non-Formosa). The EMTN matures Sep 2037, is callable annually from Sep 2023 and pays a 5.95% coupon. Self-led.


    New issues: JBIC

    • JBIC (A1/A+) plans a USD 5y Green bond after meeting investors from Sep 26. Leads are Barclays, CA, Daiwa and MS.