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Daly dashes pivot hopes; Congested dealer balance sheets?
The dovish pivot that the markets started to aggressively price in the past two sessions is waning in popularity today. Indeed, there’s been some push back in the screens today despite some largely consensus to just slightly better-than-expected economic data hitting the tapes earlier (i.e. ADP, trade balance, S&P PMI). Moreover, Fed officials continue to dash any hopes of it pulling back on the reins with San Francisco Fed President Daly stating today that any thoughts of a rate cut next year are erroneous. “I don’t see that happening at all,” Daly quipped.
Against this backdrop, the major domestic equity indices are giving back some recent heady gains in a tech-led move (Dow -1.35%, S&P -1.57%, Nasdaq -2.29%). Similarly, Treasuries are losing some of their recent luster with yields jacking up roughly 9-16bps in a move spearhead by the belly. The benchmark 10y note yield is last 15.2bps higher at 3.785% while the 5s30s spread is 5.6bp narrower at -22bps.
Further in, red and green Eurodollars are similarly 11 to 17 ticks softer as Fed cut bets are dialed back. Meanwhile, swaps spreads have flipped wider amid today’s sell-off in underlying rates amid below -average SOFR volumes as a reduction in front-end activity has not been completely offset by a pick-up in longer tenors (i.e. 3y-30y). In the backdrop, some more IG issuance has made its way into the market, but deal flow thus far this week – at roughly $3bn – is well below the $10bn originally expected.
Elsewhere, heavy Treasury market selling last week has raised concerns that dealer balance sheets are becoming congested with vintage securities that require more time for dealers to redistribute. The market gets its first peek at dealer balance sheets tomorrow (Thursday), when the Fed releases its weekly primary dealer holdings data. But strategists at Barclays note that “as of September 21 - and before the UK tax announcement triggered an increase in the dollar exchange rate and a wave of Treasury selling - primary dealers held $105bn in Treasuries” which they find “is well within the range of recent inventories and well below the nearly $300bn pile-up that occurred in March 2020 when one-directional selling caused securities to accumulate on dealer balance sheets.” Thus, so far, Barclays sees no signs of stress in secured funding markets and it expounds on this view below:
- ”… The overnight SOFR rate fell slightly, as the sell-off in the cash market caused a few issues to trade with a significant borrowing premium in repo. We sorted all the transactions in the cleared bilateral repo market and calculated the volume-based median rate, as well as the rate at the 25th percentile. The Fed excludes the latter from its SOFR calculation. Both the median and the ‘exclusion zone’ rates fell last week as the repo market distribution shifted lower. In the GC market, there has been no sign of borrowers needing to pay up to borrow cash. Instead, the overnight tri-party rate richened by 3bp to trade 8bp through the Fed’s RRP rate last week.
“…SOFR trading volumes fell last week; however, since the decline was concentrated at quarter-end, our sense is that this had more to do with quarterly reporting than any scarcity of balance sheet capacity or unwillingness of dealers to make markets. Outside of quarter-end, trading volumes have been normal.
“…At the same time, there is no sign that dealers are attempting to conserve balance sheet by increasing their sponsored repo activity. Because sponsored repo expands dealers’ ability to clear intermediated financing trades between money funds and leveraged borrower, it is an important tool for economizing balance sheet. As dealer balance sheets become congested, the value of multilateral netting through the FICC’s sponsorship program goes up. Yet, despite a one-day quarter-end spike, sponsored repo volumes continued to fall last week, as they have all summer. This suggests that outside of quarter-end, dealers do not feel any immediate pressure to conserve balance sheet.
"…Similarly, there are few signs of funding stress in unsecured markets. Stress in short-term markets typically shows up as a increase in issuance with a shortening in borrowing maturities. This reflects the fact that borrowers rush to increase their pre-cautionary cash buffers while nervous lenders step back from the market and shorten their lending horizons. Overall CP issuance has been range-bound all summer at $110-130bn/day. Financial borrowers increased their issuance following the invasion of Ukraine, but after falling in April, their daily borrowings have remained thin and low since (Figure 3). CP maturities shortened sharply this year; however, this reflects the speed of the Fed’s tightening rather than an inability of borrowers to raise term money.”
Currently, 2s 1.25bps (+0.75bps), 3s -21.25bps (+1.125bps), 5s -24.5bps (+0.625bps), 7s -29.25bps (+0.25bps), 10s -27.375bps (+0.75bps), 20s -73.125bps (+2.125bps), 30s -72.5bps (+1.75bps).
- Cargill is working on a 3y and 10y benchmark via DB, Citi, HSBC and JPM. A2/A/A. Price talk: +100bps area, +160bps area.
- John Deere Capital is working on a 2y and 7y benchmark via Citi, HSBC, JPM and TD. A2/A/A. Price talk: +65bps area, +125bps area.
- Enel (Baa1/BBB+) plans USD 3y, 5y, 10y and 30y Sustainability bonds. Leads are BNPP, GS and JPM.
- Saudi Arabian sovereign wealth fund and owner of Newcastle United FC, the Public Investment Fund (PIF), rated (A1/A), is preparing USD 5y, 10y and 100y Green bonds at around Treasuries +150 and 190bps, and 7-7.25% respectively. Leads are BNPP, Citi, DB, GS (B&D) and JPM. Books are $9bn 5y, $7bn 10y and $500m 100y.
- TD Bank plans a USD 60y NC5 LRCN (Baa1/BBB) via Citi, GS, Santander, SocGen, TD and WFS.
- CCDJ is preparing a USD 3y covered bond at around SOFR +87bps. Leads are Citi, HSBC, NatWest and RBC.
- Philippines (Baa2/BBB+) plans USD 5y and 10y bonds plus a 25y Sustainability bond. Seen at around Treasuries +155 and 200bps, and 6.55% respectively. Leads are BofA, GS, HSBC (B&D), JPM, MS, SMBC Nikko, StanChart and UBS.