USD Swaps: How low can yields go? 30y strong

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How low can yields go? 30y strong

CPI greenlit the UST rally which has seen added thrust coming off the back of the strong 30y auction result. UST yields are down 6 to 13bps lower, with the belly leading the move. The 10y note yield is last 3.425% or 11.8bps lower on the day while 2s10s is 2.3bps flatter at -70.4bps and 5s30s 1.6bps steeper at 3bps. Equities held onto modest gains into the close (DJIA +0.64%, S&P +0.13% and Nasdaq +0.64%).

The $18bn 30y reopening saw a record percentage of indirects (74.6%) versus lower directs (16.3%) but enough to see primary dealers allocated a record low of 9% of the total auction. The bid-to-cover at 2.45x was strong. “Sovereigns and central banks were buyers of the auction,” suggested one source.

With today’s rally, one trader wondered how much further the rally could realistically go, considering the 200bps of cuts priced in into the end of 2024 and down to 3% in 2025, he highlighted. “The 10y yield saw crazy price action today,” and as for the front end “no one expects that it’s going back to zero, so maybe the bid is just getting a little carried away” at this point, the trader remarked.

Looking at the CPI number, a source highlighted that services and housing equivalent rents remains “sticky” and therefore a bit troubling (for more on CPI, please see USDi).

Swap spreads lifted higher in a directional bid, and the long end led the move amid mixed  volumes. With less receiving flows from swapped issuance, spreads widened out more than 1bp in the belly. Meanwhile domestic money manager paying flows has pushed the CME/LCH basis wider by around 0.5bps in the 10y and 30y over the past week or so.

Currently, SOFR swaps 2s +1.875bps (+0.25bps), 3s -12.25bps (+0.875bps), 5s -24.25bps (+1.125bps), 7s -31.875bps (+1.125bps), 10s -31.5bps (+1.125bps), 20s -63.625bps (+2.75bps), 30s -67.625bps (+3.75bps).