USD Swaps: Flatter pre-NFP; Functionality good; Callable flurry

Rolled flat 18 Jun 2020
Traders are happy with fixed income market functionality as it prepares for the first taste this year of what may be the theme of 2023.

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


  • F/E underperforms pre-NFP; Functionality good

  • Range of NFP views from strategists post-ADP

  • Callables and Formosas

  • New issues


    F/E underperforms pre-NFP; Functionality good

    The first week in USD fixed income trading for 2023 seems to have provided some satisfaction for traders looking for liquidity and functionality after what was often a fraught 2022 in those departments. But there is still NFP to go (forecast +202K in Dec versus +263K in Nov) with average earnings seen slowing a touch to +0.4%mom/+5.0%yoy. 


    One USD swapper at an active market participant said this London lunchtime that “the main takeaway (from the new year of trading) is that there is clearly a lot of cash out there. Yields ended at a high on December 30, especially in the long end, so people have been happy to put cash to work.”


    This he said “has kept a cap on yields (10y yields are about 16bps below where they ended 2022) and massive corporate issuance has been taken down well.”


    With people clearly happy to invest after the year-end cheapening in fixed income, the swapper said a lot of focus “from now will be on the data. US CPI is starting to normalise so the Fed is looking to employment to do the same. The ADP data (very strong this week) is not a great indicator of NFP so I don’t automatically expect any great shock this afternoon.”


    Looking ahead he said that in the event there isn’t a massive NFP surprise, next week should see more of the same, with swap spreads “likely to be hammered down by more corporate issuance… we are expecting a lot.”


    If last year’s data focus was all about inflation, and if that is starting to shift in the US to employment, especially as the mechanics of CPI will start to naturally weigh on headline levels in a few short months, then today could be an early tone-setter for the rest of the year.


    In preparation for NFP, and no doubt with a weary eye on that ADP number, the curve has flattened, with 2y UST yields currently +1.7bps at 4.475%, 5y is similarly higher at 3.93%, 10y is +0.7bps at 3.725% and the 30y is -1.3bps at 3.78%. Swap spreads are mixed with some key issuance points allowing themselves to edge a bit higher given the abrupt pause in supply.


    Currently the 2y SOFR swap spread is -0.25bps at +2.00bps, 5y is unchanged at -27.00bps, 10y is +0.25bps at -32.75bps and the 30y is -0.25bps at -74.75bps.


    Strong payrolls expected again

    Looking ahead to the imminent December NFP data, strategists at BNPP said this morning that “we estimate non-farm payrolls to print 240k in December. Going into today's release, US labour market data has continued to signal strength: yesterday brought surprises to ADP Employment as well as Initial and Continuing Jobless Claims.”


    Deutsche Bank said today that despite the strong ADP number “our US economists are looking for nonfarm payrolls to have grown by +175k in December, which should keep the unemployment rate steady at 3.7%. Keep an eye on average hourly earnings growth as well, particularly given the Fed’s focus on wage inflation. Our economists are expecting that to step down to +0.3%, having come in at a 10-month high of +0.6% last month.”


    And sitting neatly in the middle of these two views, Barclays strategists said this lunchtime that “We forecast that monthly nonfarm payroll employment gains will slow from +263k in November to +200k in December. We expect a similar deceleration in private payrolls, from +221k to +175k. This would put payrolls on pace to average around 249k per month in Q4, due to the Fed's tightening in financial conditions gaining increased traction on labor demand. Meanwhile, we expect little to no change in wage pressures, with average hourly earnings rising 0.4% m/m (5.0% y/y), similar to the average pace since late 2021.”


    Callables and Formosas

    • Natixis sold a $130m 15y NC6 fixed callable (non-Formosa). The EMTN pays a 5.46% coupon, matures Jan 2038 and is callable annually from Jan 2029. Announced Jan 5 and self-led.


    • DBS sold a $90m 15y NC4 zero coupon callable (non-Formosa). The EMTN has an estimated IRR of 5.05%, matures Jan 2038 and is callable annually from Jan 2027. Announced Jan 5.


    • IBRD sold a $50m 15y NC4 fixed callable (non-Formosa). The EMTN pays a 4.94% coupon, matures Jan 2038 and is callable annually from Jan 2027. Announced Jan 6 and lead is JPM.


    • Standard Chartered sold a $40m 15y NC5 zero coupon callable (non-Formosa). The EMTN has an estimated IRR of 5.68%, matures Jan 2038 and is callable annually from Jan 2028. Announced Jan 6.


    New issues

    • Bank of Montreal yesterday priced a $2.5bn 3-part ($1bn 2y fixed, $300m 2y FRN and $1.2bn 5y). Leads BMO, BofA, Citi, JPM and MS.  A2/A-/AA-.  +80bps, SOFR +71bps, +130bps.


    • Romania (Baa3/BBB-) yesterday priced a $3.75bn 3-part ($1.24bn 5y, $1.5bn 10y and $1.25bn 30y). Leads BNPP, HSBC (B&D), ING, RBI and UniCredit. +280bps, +350bps and +385bps.


    • HK Airport Authority (AA+) yesterday priced a $3bn 4-part ($500m 3y, $1bn 5y Green, $700m 7y and $800m 10y). Leads BofA, HSBC (B&D), JPM, StanChart and UBS. +70bps, +90bps, +115bps and +125bps.