USD Swaps: Front end spreads tighter as new issues arrive
Yields up, spreads edge in
Swap spreads are mostly tighter except at the long end and UST yields are 3-5bps higher led by the belly on a quiet day for data. Spreads are -2.00bps (-1.00) in 2s, -23.50bps (-0.25) in 5s, -31.75bps (unch) in 10s and -68.75bps (+0.25) in 30s with a range of FIG and corporate issuance arriving are more firms report Q4 earnings this week. Still, swap volumes are lower than normal except in the 30y bucket. In the news, a WSJ article yesterday (link) reviewed signs that the Fed has set course for a “milder”, 25bps rate hike next month.
Stay short front end spreads: Banks
The approach of the debt ceiling – and associated actions taken by the Treasury – attract the attention of analysts at Citigroup this week, ahead of next week’s quarterly refunding announcement. They explain:
- “Treasury is unlikely to increase auction sizes with the debt ceiling backdrop…If QT goes into 2024, Treasury will need to materially increase coupon auction sizes at some point later this year or early next to keep T-bill share below 20%...We expect QT to end in December 2023 due to our recession call.”
“The key story at the refunding will be the financing estimates released at 3pm on January 30th…We may get some color around where they see TGA going, given the fact the X-date is not likely until H2.”
“We still see it (X-Date) for early September, with risks for October or August, depending on how revenues play out. We expect a little over $800bn in issuance in the months following a debt ceiling deal (we pencil in early October)…Secretary Yellen stated she is “confident” that measures will last until early June.”
“Our core views remain relatively unchanged…Remain short TU invoice spreads: Front-end spreads should be pressured lower, with the deluge of bill supply combined with falling reserves. Reserves will fall near-term as we estimate TGA is built to $600 to $650bn by January month-end. This will put additional pressure on bilateral GC, which has stayed elevated through January. We remain short TU invoice spreads.”
Elsewhere, NatWest strategists also stay short front end spreads but are wary of a change in direction from March:
- “We thought front end spreads would cheapen due to the inflow of new collateral into the market and discussed the 2s3s spread steepener as an attractive (both directionally and from a carry perspective) way to position for it.”
“Post the issuance and debt ceiling related announcements, front end spreads did cheapen and the curve steepened. At these levels, we think the upside is more limited. However, the trade does carry positively and the wave of extra collateral coming into the market should help keep short-dated cash cheap to funding and we think keep the 2y spread in slightly negative territory.”
“We will re-evaluate frequently but depending on levels would consider taking the opposite side as we get into March, where the collateral story will flip around.”
New issues
- Truist Financial plans USD 6y NC5 and 11y NC10 bonds at around Treasuries +155 and 185bps. Leads are Barclays, MS and TSI.
- Procter & Gamble is preparing USD 3y, 5y and 10y bonds in the area of Treasuries +45, 55 and 75bps. Leads are Citi, GS and MS.
- Keybank plans USD 3y and 10y bonds in the region of Treasuries +112.5 and 180bps. Leads are DB, JPM, Keybank and MS.
- Cesars Entertainment is preparing a $1.25bn 7y NC3 secured note. Leads are Barclays, BofA, Citi, Citizens, CS, DB, GS, JPM, MQB, SMBC, TSI, USB and WFS.
- Turk Eximbank (B3/B-) plans a USD 3y after meeting investors from Jan 23. Leads/GCs are Citi, ING and StanChart.