USD Swaps: USTs gain amid risk-off tone; Bond bull's back

 USTs rally as risk-off returns

Stock futures are in the red again before the open with the Nasdaq -0.7% following China’s rushed move away from its zero-Covid policies despite a concerningly low level of vaccination among some vulnerable groups. Treasury yields are 6bps lower led by the front of the curve despite mild weakness in European fixed income through the morning while Eurodollars are 1-4bps firmer in the reds.

In the news, Brevan Howard’s BH Macro feeder fund reported a +0.19% gain in the month to Dec 2, leaving the fund up 18.89% for the year  to date. That follows a -1.11% loss for November as 10y yields fell by around 40bps and the dollar FX index lost 5.5%.  

Bull back, 10s/30s steepeners favoured - HSBC

Even after a year in which surging inflation, rate hikes and a massive range for the 10y threatened to produce the worst year for bonds in the last century, analysts at HSBC point out that the aggregate Bloomberg index has already recovered almost 6% since UST yields peaked in late October, and now stands down 12% for the year.

Ahead, HSBC is bullish for Treasuries in 2023, with a year-end forecast for the 10y of 2.50% - 100bps below spot levels and 130bps less than forwards.

Moreover, its “strongest conviction” view is for long end 10s/30s steepening given the flatness of the curve a year forward. The bank gives the following rationale:

”For Q1, we expect continued high volatility for the bond market and see range trading as the best strategy as a result…(reflecting a view that) healthy tension between bulls and bears will persist in the near term.”

 

“Investors are focused on the risks to the growth outlook, and are likely to put too much weight on ‘noise’ in high frequency data. In contrast, the FOMC is likely to continue to focus on inflation and is unlikely to shift its outlook based on one or two months of data.”

 

“We use scenarios of 5%, 3%, and 1% to frame our 10-year forecast…The hawkish scenario is represented by 5%. We think this is very hawkish, not least because it is 150bp above where the 10-year trades today….Fed funds is 4% but it is expected to be 100bp higher by Q1 2023 according to futures, which means a lot of tightening is already in the price.”

 

“The 3% base case scenario reflects the possibility of a transition from the inflation dominance in 2022. Arguably this is happening already, which is why the Treasury yield is trading closer to this scenario than the hawkish one. An eventual transition would anyway be consistent with the guidance provided in the (Fed’s) dot plot. These projections are scheduled to be updated 14 December 2022, and we doubt the longer-run equilibrium will change significantly.”

 

“1% is just a scenario. If the Fed is in easing mode in late 2023, as the futures markets currently imply, it is likely that the bond market will move to anticipate much more.”

New issues

• Brandywine Operating yesterday priced a $350m 5y via BofA and Citi. Baa3/BBB-.  +400bps.