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Post-FOMC hangover; 10y TIPS tap; Spreads narrow
A big hangover has set into the Treasury market today after yesterday’s hawkish rate hike by the Fed as yields have shot a sizeable 9 to 17bps higher across the entire curve this morning. Indeed, the benchmark 10y yield up 16.6bps at 3.698% as it pushes even further into extreme oversold territory on the 14-day RSIs, one source highlighted. Meanwhile, on the curve, the belly (i.e. 7y) is bearing the brunt today’s selloff, leaving the 2s7s30s fly 11bps cheaper at -9.35bps.
In swaps, spreads are tighter across the board with the front-end underperforming amid below-average SOFR volumes overall as a fall in volume in the wings (i.e. 1y and 30y tenors) has not been offset by a bump in the tenors in between. In the backdrop, despite post-FOMC moroseness still weighing on risk sentiment today (Dow -0.44%, S&P -0.97%, Nasdaq -1.52%), some IG issuers have lined up to float some deals as the window reopens today with Citigroup headlining the pack.
Ahead, the Treasury will reopen the 10y TIPS (TIIJul32s) for $15bn, a new record size for a TIPS reopening this afternoon with breakevens currently 4bps higher in the sector. “Recall the last TIPS auction (30y) came 5.7bps through and was considerably lower in real yield and higher in breakeven, with generally strong inflation data in between but the obvious counterweight of the increasingly hawkish Fed,” one trader assessed as he leaned favorably heading into today’s auction.
Elsewhere, strategists at BofA believe that “with each passing day that the Fed is not succeeding in its inflation fight, Fed hawkishness will rise - both from Fed and the markets that price their path. When the clock is ticking, the alarm bells ring louder with each passing strong print.” And with yesterday’s hawkish hike the bank’s near-term core views remain unchanged: stay underweight front end & lean long back end w/ increased risks of a hard landing. However, beyond the short-term, BofA favors going long the 10y sector but not at a specific level, but rather the last Fed rate hike. BofA explains:
- ”… History suggests that the time to buy 10y notes is the last delivered hike. The past 5 out of 5 tightening cycles show a clear pattern of falling rates after the last hike. While 5 historical data points do not provide a statistically significant result, we find it very intuitive. Whatever it is that causes the Fed to pause is the same thing that sees investors buy bonds: declining inflation, softening jobs, recession fears, falling equities, etc.
“…The rates market is watching for a slowing of activity, lower inflation, & recession before buying duration. Our Econ team thinks recession will be 1Q23 which seems like a reasonable possibility. Rather than focusing on a level to buy, we will watch for a turn in the data and the Fed and look to go long as we get close to the last hike.
“…Significantly also, the recent market dynamic is a worst case scenario for 60/40 and risk parity portfolios, and renews investors' concerns over the utility of USTs as a portfolio hedge. The view for this utility has fluctuated over the last year. Into the June selloff the consensus was for decreasing utility, but in the subsequent rally (from 3.47% peak yields down to c.2.7 by end-July) investors started to see a renewed role for USTs. The biggest driver for this shift in view back in June was some crystallization of the policy path and the view for peak inflation likely behind us. In reality, however, the diversification benefits of USTs in portfolios have been rather limited recently. This is against our expectations for a more orthodox late-cycle dynamic.”
Currently, 2s 11.5bps (-2.125bps), 3s -10.75bps (-2.875bps), 5s -19bps (-0.75bps), 7s -26.25bps (-0.5bps), 10s -22.125bps (-0.625bps), 20s -59.125bps (-0.125bps), 30s -59.25bps (-0.375bps).
- Citigroup is working on a self-led 4NC3 fixed/FRN benchmark. A3/BBB+/A. Price talk: +170bps area, SOFR equivalent.
- WEC Energy is working on a $900m 3y and 5y deal via WFS, Barclays, JPM, MIZ and TD. Baa1/BBB+/BBB+. Price talk: +120bps area, +155bps area.
- Ohio Edison is working on a $300m 10y deal via MUFG, PNC and RBC. A3/BBB/BBB+. Price talk: +210bps.
- Digital Realty is working on a $400m 5y deal via BofA and SMBC. Baa2/BBB. Price talk: +180bps area.
- Blackstone Private Credit is working on a $300m 3y deal via BofA, Citi, TSI and WFC. Baa3/BBB-. Price talk: +337.5bps area.