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
“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%.”
“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.