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Sobering data impact persisting; USTs back in the black for 2023?
The major domestic equity indices have opened up lower once again today (Dow -0.45%, S&P -1.08%, Nasdaq -1.52%) as some recent U.S. data has soberingly reminded market participants that the Fed still has its foot on the gas pedal for rate hikes - albeit potentially at a reduced MPH clip. And while things are relatively tame on the data-front today (i.e. trade balance -$78.2bn versus -$80bn Bloomberg consensus), investors still have a keen eye on Friday’s one-two punch of PPI and the University of Michigan report.
In rates-space, Treasuries are narrowly mixed (+/- 1bps) in the early trade today with the benchmark 10y note yield 0.6bps lower at 3.566% while the 5s30s spread is 1.3bps narrower at -21bps. Meanwhile in the Eurodollar trading pits this morning, red and greens are also narrowly mixed (+/- 1 tick) as the market looks for some impetus today. And in swaps, spreads are mostly lightly offered ahead of a very light slate of IG issuance this session.
More broadly, “through November, US Treasuries have produced a total return of -12.5%, setting up 2022 to be the worst year of performance since at least 1986,” strategists at Deutsche Bank note in their most recent FI Weekly. In comparison, the bank notes that “US corporate bonds are down 13.0% and the S&P 500 is down 15.7% over the same period. Both asset classes have traditionally outperformed Treasuries in rising-rate environments, but nothing was typical in this extraordinary year.”
Turning the page, Deutsche Bank believes that “Treasury returns next year should look more in line with the past” and the bank expounds on this view below:
- ”…With yields now at their highest levels in over a decade, Treasuries provide a more attractive coupon income and bigger cushion against a further rise in rates. To estimate next year’s total return potential, we regress returns from Bloomberg Treasury sub-indices1 on their respective benchmark yields and their changes. These forecasted values are then reconstituted into the main US Treasury Index.
“…Given our current forecast, we expect Treasuries to generate a total return of around 3.7% next year, assuming Treasury yields finish 2022 at the same levels as the end of November (same based on post-NFP yields at time of writing). These are still somewhat below the long-term average of 5.5% for Treasuries but a welcomed departure from the losses over the last two years.”
Currently, SOFR spreads – 3.5bps (-0.5bps), 3s -16.75bps (-0.5bps), 5s -25.5bps (-0.125bps), 7s -34.875bps (-0.625bps), 10s -32.125bps (-0.75bps), 20s -65bps (-1.375bps), 30s -67.25bps (+0.125bps).
Formosas & ZC callables
- Societe Generale sold a $20m 10y NC4 floating callable Formosa. The EMTN matures Dec 2032 and is callable annually starting Dec 2026. Lead N/A. Pays coupon of 2y SOFR +1.6%. Announced Dec 1.
- Brandywine Operating is working on a $350m 5y deal via BofA and Citi. Baa3/BBB-. Price talk: +400bps area.