USD Swaps: Rally takes flight, but fast money fades; Paying flows

Test image by sara
USTs rallied into double digits, with the 10y note yield hitting 3.40%. Fast money was seen fading the rally, sources highlight, and spreads widened.

Start a free trial to read this article

Join today to access all  Total Derivatives content and breaking news. Already a subscriber? Please Log In to continue reading.

Or contact our Sales Team to discuss subscription options.

Get in Touch
Blurred image of Total Derivatives article content



  • Rally takes flight, but fast money fades; Paying flows  

  • JPM, GS active GSIB score management and year-end funding – Deutsche 

  • New issues


     Rally takes flight, but fast money fades; Paying flows  

    Treasuries continued to fly higher this afternoon, as the rally mode unspooled further with little resistance. The 10y note yield tested 3.40% earlier today is last 11.2bps to a new low yield of 3.417% - levels not seen since early September. The UST rally has been relatively parallel through the curve with 2s30s just 1.5bps flatter and 2s10s USTs around unchanged at -84.5bps.


    Equities end the session modestly lower (DJIA 0.0%, S&P -0.3% and Nasdaq -0.51%) - the muted session distinctly at odds with the large rally in bonds. Amid the rally, sources highlight that fast money has been fading the move throughout the session.


    Swap spreads have widened amid outright paying flows, and swap spreads have widened out further this afternoon, with the longer end leading the widening. Meanwhile, 10y repo was special and hit 1.85%, sources note, adding to reasons to be long spreads in the maturity.


    Elsewhere, IG supply remains anemic, with another sub $1bn today, bringing the weekly volume to $4.25bn or well under $10 to $15bn that had been expected for the likely penultimate week of supply for the year.    


    Currently, SOFR swaps 2s 4bps (+1bps), 3s -16.5bps (+0.875bps), 5s -24.375bps (+1.375bps), 7s -33.75bps (+1.5bps), 10s -31.25bps (+1.125bps), 20s -64.25bps (+2.375bps), 30s -66.75bps (+2bps).



    JPM, GS active GSIB score management and year-end funding – Deutsche  

    Analysts at Deutsche examine the recent the Q3 GSIB scores that were released. “Scores fell across the board for the eight large US banks by an average of 10 points, with MS (-16), JPM (-15), and BOA (-15) leading the score reduction” and compared to their year-end scores for 2021, “most banks were either flat or meaningfully lower with the exception of JPM, whose Q3 score of 882 is 27 points higher.”


    “Of course, JPM typically gets the most attention for its size but also because it faces consecutive surcharge increases in 2023 and 2024 (based on the year-end scores reported in 2020 and 2021)” but “it can neutralize the second increase if its score shrinks below 830 this year” and further, “a 50+ point drop in Q4 is ambitious but not out of reach,” Deutsche suggests.


    In past years, for example, “JPM shrank its score by 45 and 46 points in 2018 and 2019, and by 43 points in 2021” and “upward pressure on capital requirements certainly gives management greater incentive to shrink more aggressively this year,” Deutsche says.


    Moreover, Deutsche finds that “GS could be another bank primed for active score management this year” as “GS also jumped a GSIB bucket in 2021” like JPM.  “But GS's Q3 score of 660 is 7 points below last year's score, and it needs another 31 points to neutralize the surcharge increase,’ it finds. “In 2017 2019, GS successfully lowered its score in Q4 by between 25 and 28 points” and “similar to JPM, GS is also well within capacity to move back to a lower GSIB bucket this year,” Deutsche points out.


    As a gauge of how funding markets are currently positioned, Deutsche regresses the average of 3m xccy basis in EUR, JPY and GBP on notional amounts of OTC derivatives and cross-jurisdictional activity – two key GSIB indicators that historically see the biggest seasonal drop in Q4 – across the eight GSIBs.


    From this analysis, Deutsche finds the model and market values are “currently very close,” which suggests “that traders are anticipating a similar magnitude of tightening as in those years” and thus “reasonable to conclude that funding markets are at least charging adequate premium for year end.”


    Nonetheless, “JPM and GS’ behavior toward year-end score management remains a key risk to market pricing,” Deutsche warns.


    New issues


    • ICBC Macau Branch priced a $250m 2y Reg S 2y FRN benchmark. A/A1/A.  SOFR + 80bps.


    • National Rural Utilities priced an upsized $400m 5y. Leads JPM, MIZ, MUFG, RBC and TSI.  A2A-/A.  +120bps. Upsized from $350m.