USTs selloff in CPI vigil; 3y and 10y supply
Treasuries sold off in with yields last up to 4.5bps higher, led by the 2y. The 10y note yield is last 3bps higher at 3.615% while 2s10s is last 0.25bp flatter at -77.5bps and 5s30s close to unchanged at -21.5bps. Equities ended higher (DJIA +1.58%, S&P +1.25% and Nasdaq +1.26%).
This morning’s $40bn 3y auction came 0.7bps through the 11:30am bid side, drawing a rate of 4.093% with slightly lower indirects (61.7%) more than offset by higher directs (20.4%), leaving dealers with a record low allocation of 17.9%. The bid-to-cover was a smidge lower at 2.55x.
In contrast, the $32bn 10y reopening saw a large 3.5bps tail versus the 1pm bid side, drawing a rate of 3.625%. However, the stats showed both indirects and directs were slightly higher at 59.4% and 18.7%, leaving dealers with 21.9% while the bid-to-cover came at 2.31x. Tomorrow sees the $18bn 30y reopening post-CPI.
Swap spreads widened but then reversed narrower as underlying bonds sold off. The illiquid long end has continued to outperform relative to the front end of the spread curve. Elsewhere, IG new issuance saw a $3bn 3y NC2 fixed to FRN from JP Morgan.
Turning to spread vs. UST changing behavior, analysts at BofA highlight that “one of the most dramatic changes to swaps spreads in recent years is that we now see Treasuries cheapening to swaps in risk-off events.” BofA believes that “this is a result of low liquidity and friction amongst dealers to liquify Treasury holdings during a dash for cash.”
“Risk-off events can include a geopolitical conflict, an equity market breakdown, a housing crash, a credit market default wave, a bad debt ceiling episode, a resurgence of the pandemic, a margin call episode, and other possibilities” and “these types of events we think would all lead to cheapening of Treasuries versus swaps, even if rates rally," BofA finds.
As a result, BofA believes this makes “spread wideners - contrary to past decades - at risk to ‘black swan’ events, which makes spread wideners in general an overall riskier trade compared to the past.”
Currently, SOFR swaps 2s 2.375bps (-1.75bps), 3s -17.25bps (-0.625bps), 5s -23.5bps (+0.25bps), 7s -32.875bps (-0.25bps), 10s -30bps (-0.5bps), 20s -61.75bps (+0.25bps), 30s -63.75bps (-0.125bps).
For a complete review of issuance over the past week, please see USD New Issues.
- JP Morgan priced a $3bn benchmark 3y NC2 fixed to FRN. Self-led. A1/A-/AA-. +115bps.