USD Swaps: Bonds, equities both sold; 10y spread wideners

Chart numbers 14 Jun 2022
USTs dove lower, led by the front end and belly. The swap spread curve steepened versus the UST bear flattening. Barclays likes 10y spread wideners.

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  • Bonds, equities both sold; 10y spread wideners  

  • Zero-coupon callables and Formosas

  • New issues


    Bonds, equities both sold; 10y spread wideners   

    Treasuries have been hit down with the 3y and 5y maturities leading the selloff. The higher than expected ISM Services print started the selloff, and yields continued to climb higher this afternoon after an initial dip back mid-morning. The 10y note yield is last 3.596% or 10.5bps higher on the day. Meanwhile 2s10s is last 2.5bps flatter while 5s30s pancaked 8.5bps to -19bps - the lowest level since the beginning of November. Equities closed off the lows, but still much lower on the day (DJIA -1.4%, S&P -1.88% and Nasdaq -1.93%) and both bonds and equities sold off in tandem.


    Elsewhere, the swap spread curve steepened versus the underlying UST flattening, with front end and belly spreads narrowing from the morning highs, Meanwhile spreads in the long end flew higher, led by the notoriously illiquid 20y maturity that gapped nearly 3bps wider for the session. On the supply front, IG supply priced a total of $3.5bn with two issuers (Duke Energy and Energy Transfer) involved. 


    Looking at the level of spreads, analysts at Barclays now recommend 10y SOFR spread wideners. “10y spreads traded within a 10bp range for much of this year in the upper -20bp area, until September, when it tightened into a new range,” and though the bank has not been bullish 10y spreads for much of this year, it now finds with the recent move tighter in spreads, “the risk/reward for 10y spread wideners is now attractive at these levels, with scope to widen back towards the -25bp area,” Barclays finds. 


    “Further tightening would put 10y spreads close to the COVID lows of March 2020, when Treasury market function was impaired” and “while liquidity conditions have deteriorated this year, they are still benign relative to 2020,” Barclays assesses.


    “Much of the recent weakness in 10y spreads came in the second half of September, when the BoJ announced FX intervention measures to defend the yen, which sparked concerns that other central banks may follow suit and sell Treasuries to defend their own currency,” the bank adds, but now “this should not be a concern now, given the yen’s appreciation,” it judges. 


    Spread tightening “was further exacerbated by the UK pension crisis, which sharply tightened longer-tenor spreads,” and Barclays believes that “the overhang from that episode should fade over time.” Then, “10y spreads managed to find support, but came under renewed pressure as rates rallied after the November FOMC meeting, when the committee discussed the possibility of moderating the pace of hikes at upcoming meetings” and “this, along with the upside surprise in issuance from corporate borrowers, tightened spreads lower into a new range,” Barclays explains.


    Currently, SOFR swaps 2s 3.5bps (+1bps), 3s -16.75bps (-0.125bps), 5s -25.75bps (+0.125bps), 7s -34.375bps +-0.25bps), 10s -31.5bps (+1bps), 20s -63.25bps (+2.75bps), 30s -67.375bps (+1bps).



    Zero-coupon callables and Formosas


    • Asian Development Bank sold a $15m 15y NC5 zero coupon callable (non-Formosa). The EMTN matures Dec 2037 and is callable annually starting Dec 2027. Lead JPM. Estimated IRR 4.69%. Announced Dec 5.


    New issues

    For a complete review of issuance over the past week, please see USD New Issues.


    • Energy Transfer priced a $2.5bn 2-part ($1bn long 5y and $1.5bn long 10y). Leads DB, Barclays, BofA and WFS. Baa3/BBB-/BBB-. +175bps and +215bps.


    • Duke Energy priced a $1bn 2-part ($500m 3y and $500m 5y). Leads MUFG, BofA, CS, RBCCM and TSI. Baa2/BBB. +88bps and +123bps.


    • Athene Holding priced a $500m perp NC5 $25 par preferred. Leads WFS, BofA, MS and RBC. Baa3/BBB/BBB. 7.75%.


    • Royal Bank of Canada priced a $1.25bn 3y USD Covered bond. Leads Barclays, Lloyds and RBC (B&D). Aaa/AAA. Mid swaps +85bps.