USD Swaps: Flatter; Minutes; UST-Bund tighteners?

Chart 24 Nov 2021
The UST curve is flatter with the front end weaker ahead of the minutes and the holiday. Banks eye Treasury-Bund tighteners for 2023.

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  •  Flatter as front end weaker

  • Treasury-Bund spread seen heading back to 100bps in 2023: DB  

  • New issues



    Flatter as front end weaker

    A selloff at the front end has helped to flatten the curve today with Eurodollars up to 8bps weaker in the reds, 5y yields +4bps at 3.99% shortly after the initial claims data, and 5s/30s around 4bps flatter. In swaps, outright volumes are understandably a touch below average ahead of the holiday and spreads are mixed with 2s at 3.25bps (+1.50), 5s at -22.75bps (-0.125), 10s at -31.75bps (+0.25) and 30s at -73.75bps (+0.125). S&P futures are edging into the green, bitcoin is 2% stronger and WTI has fallen by $2.25 to $78.7 this morning after suggestions that the EU’s price cap for Russian oil could be set at close to current market levels.


    Ahead, the Fed minutes, to be released later today, are likely to show the Committee expressing a hawkish tilt, according to BNP Paribas:


      “The November FOMC Minutes should reinforce the message that the Fed is not done hiking even if it is set to downshift the pace. Chair Powell's main message at the November FOMC meeting was that the Fed's ‘principle focus’ is now terminal fed funds, and how long it stays there, rather than the pace of hikes. If the median dot moves up by 50bp to our own forecast, and market pricing stays where it is, this would be the first time this cycle that the dots would be more hawkish than the market.”


    Treasury-Bund spread seen heading back to 100bps in 2023: DB  

    Expect a “notable” tightening of the 10y Treasury-Bund spread according to rates strategists at Deutsche Bank this week, writing in their 2023 outlook.  


    They look for the tightening to occur against the background of a fall in Treasury yields to 3.65% at the end of 2023, while they see Bunds underperforming and ending next year higher in yield, at 2.60%.


    Deutsche Bank warns that their conviction on duration is “materially lower” than during the past few years, when the bank believed that rates and the Fed had “significant” catching up to do. Hence the bank is neutral the front-end in the US, and is looking for only ~25bps more to be priced in Europe.


    Still, Deutsche suggests that a 10y spread tightener is attractive, for a number of reasons:


      “First, the Fed should go through the three stages of pivot ahead of the ECB. It is ahead in its tightening cycle, as evidenced by real rates that are more restrictive.  Fiscal policies could potentially diverge, which would impact relative monetary  policies. Finally, a potential reopening in China should have a greater impact on  Europe than the US.”


      “Second, core inflation in Europe is at similar levels as in the US, and both our  economists' forecast and the inflation market are consistent with more sticky inflation in Europe.”


      “Third, the cross market spread has peaked around 100bp pre GFC vs. 200-250bp post GFC. However, the higher UST yields were  justified by a diverging inflation outlooks. Moreover, following the 2016 presidential  election, the US embarked on a pro-cyclical easing of fiscal policy that did not  happen in Europe. Neither of these arguments apply today. In fact, they are both reversed.”


    Deutsche Bank looks for the 10y spread to tighten back to pre-GFC peak levels of around 100bps, from around 178bps today.


    New issues

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


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


    • Dubai Islamic Bank yesterday priced a $750m 5y Sukuk at Treasuries +155bps. Leads are ABC, DIB, ENBD, FADB, HSBC, KFH, SIB, StanChart and TICPS.