USD Swaps: USTs bull-flatten; Spreads tighten; Lower 10y yields eyed in 2023

Chart numbers candles 14 Jun 2022
USTs are bull-flattening ahead of more Fed-speak today while swap spreads tightening amid IG issuance. NatWest eyes lower 10y yields in 2023.

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  • USTs bull-flatten; Spreads tighten; Lower 10y yields eyed in 2023

  • Formosas & ZC callables

  • New Issues


    Click here for SDR USD IRS trades.


    USTs bull-flatten; Spreads tighten; Lower 10y yields eyed in 2023

    Longer tenor Treasuries have continued to grind higher but shorter tenors have lost some of the gusto as Fed’s Mester is currently teeing off a trio of Fed speakers today that will also include appearances from George and perennially hawkish Bullard this afternoon.  The benchmark 10y note yield is last 6.5bps lower at 3.773% while the 2s10s spread is another 2bps narrower at a new multi-decade low of -75.2bps. 


    In the Eurodollar trading pits, reds and green are 2.5 to 5 ticks firmer while longer tenors are chalking up gains of up to 8 ticks in the outperforming Dec27 contract.  Meanwhile, swaps spreads are tighter across the board amid below-average SOFR volumes as swapped issuance from SSAs Swedish Export Credit and Nordic Investment Bank headline today’s deal flow. In the backdrop, all the major domestic equity indices are modestly in the green amid a flurry of better than expected earnings/forecasts (Dow -0.83%, S&P +0.70%, Nasdaq +0.46%).


    Separately, with the holidays and year-end quickly approaching, banks have begun looking into their crystal balls to see what may lie ahead for the rates market in 2023.  With the U.S. expected to enter a recession starting in 1Q23 and lasting through 2Q23, and with their expected terminal fed funds rate of 5% well-priced, strategists at NatWest look for yields to peak if they have not already – specifically they see 10y yields ending 2022 at 3.9% and 2023 at 3.35%.  NatWest expounds on its view below:


      ”… We enter 2023 tactically favoring long duration in the 10yr sector, as the front end will still be vulnerable to a hawkish Fed as it attempts to keep financial conditions tight in order to ensure inflation declines as anticipated. In addition, while some believe the passing of the midterm elections will lessen the political pressure on the Fed to deal with inflation, with the Democrats expected to lose the House, we believe the pressure on the Fed will only increase. The Administration is likely to prefer the recession (and inflation’s decline) to come now, so that in 2024 (into the next Presidential election), the population is no longer focused on high inflation and the Fed is (hopefully) easing. The typical front end rally into a recession, in our view, will therefore be delayed until later in 2023.


      “…While the timing will depend almost wholly on the speed of inflation’s decline, and thus is inherently difficult to predict, we believe the most likely timing for the bull steepening rally is in Q2 as the market (and the Fed) gains confidence that inflation is indeed declining. Importantly, this also means any early repeated “pivot” hopes in the market should be faded, as we have seen several times in the second half of 2022.”


    Currently, 2s 0.875bps (-3bps)*, 3s -15.625bps (-2.25bps), 5s -21.125bps (-1.875bps)**, 7s -32bps (-1bps), 10s -31.125bps (-1.375bps), 20s -71.375bps (-1.875bps), 30s -73.375bps (-1.375bps).


    * adjusted for the 2.2bps give.

    ** adjusted for the 3.3bps give.



    Formosas & ZC callables


    • Societe Generale sold a $28.5m 10y NC4 floating callable Formosa. The EMTN matures Dec 2032 and is callable annually starting Dec 2026 and pays a coupon of 5y ICE SOFR +175bps. Leads Cathay, E Sun and SG Securities HK. Announced Nov 16.



     New issues

    • Dubai Islamic Bank plans a USD 5y Sukuk at around Treasuries +175bps. Leads are ABC, DIB, ENBD, FADB, HSBC, KFH, SIB, StanChart and TICPS.  


    • Swedish Export Credit launched a $1.75bn 3y Global at swaps +51bps. Leads are BofA, BMO, Scotia, MS. Aa1/AA+.


    • NIB launched a $350m tap of its May 2026 FRN at SOFR +41bps. Leads are HSBC and JPM.