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USTs lose some more air; Debt limit dominates - X-date trades
Bond market participants continued to let some of the air out of the recent Treasury rally, with yields climbing another 3-6bps today in a relatively composed sell-off to kick off the trading week. Heading into the close, the benchmark 10y note yield is last 4.2bps higher at 3.523% and the 2s10s spread is 2bps narrower despite some weaker-than-expected data this morning (i.e. leading indicators -1% versus Bloomberg consensus -0.7%) and the virtual vacuum of any further ‘hawk-talk’ today as Fed officials are in their blackout.
Further in, the underperforming red and green Eurodollars chalked up another 5.5 to 8.5 ticks of losses this session. Meanwhile, in swaps, spreads ended mostly narrower amid below-average activity overall, despite a decent pick-up in flows at the 30y point today. In the backdrop, just a small peppering of IG issuers tapped the market today after an underwhelming showing from FIG issuers last week (see Total Derivatives) despite a buoyant risk tone (Dow +0.76%, S&P +1.19%, Nasdaq +2.01%). Today’s IG headliners included Truist Financial that came with a 2-part $3bn deal and P&G that came with a $2.1bn 3-part deal.
Elsewhere, the debt limit remains a key theme in the rates market after the US hit its statutory debt borrowing limit last Thursday, and the Treasury Department has begun using extraordinary accounting measures to generate additional cash to continue financing operations and avert a default on its debt. Some dealers have weighed in on the topic (see Total Derivatives) and strategists at BofA also throw in their two-cents on the supply/market impact below:
- ”… EM & bill supply: Treasury has already used EM headroom to meaningfully ramp up bill supply. The timing of EM & associated large bill supply increase signals to us that UST debt managers were uncomfortable with a cash balance in the $300-350b range. Going forward we expect a more limited $130b increase in bill supply for the reminder of Q1 & expect to see $140b in bill supply cuts over Q2 (for more detail see US front end). Increased front end supply today will largely be reversed tomorrow. Investors should extend while they can.
“…The recent mini-surge in bill supply cheapened the front end, as we expected, & is a case study for the much larger bill surge post DL resolution. The sharp increase in bill supply has cheapened 1 & 3m bills vs OIS by 25-30bps since end '22, pushing both levels near OIS flat & towards the cheapest levels in the past 1Y. The surge in supply has also likely increased dealer UST holdings & resulted in a meaningful increase in SOFR volumes. Increased dealer UST holdings & higher SOFR volumes should also push SOFR higher vs ON RRP. These dynamics have also resulted in a drop in ON RRP that we expect will hold until Q2 bill supply cuts.
“…Bottom line: stay long duration stay tactical in 10Y 3.25-3.75% range. We would look to add duration on any near term rate backup above 3.5%.”
Lastly, looking ahead, market participants await major GDP and core PCE data later this week that many believe will confirm Fed calls to let off the gas on the pace of rate hikes.
CME Group: Dress Rehearsal for USD LIBOR Basis Swap Splitting
CME announced today that it will be conducting a dress rehearsal for the splitting of USD LIBOR basis swaps in the New Release testing environment on Friday, January 27, 2023. This process replicates the Production USD LIBOR basis swap splitting to be held on Friday, March 24, 2023. Please see here for more details.
Currently, SOFR swaps – 2s -2.25bps (-1.125bps), 3s -15bps (-0.625bps), 5s -23.75bps (-0.25bps), 7s -31.5bps (-0.125bps), 10s -32.125bps (-0.25bps), 20s -61.5bps (+0.375bps), 30s -69.125bps (-0.126bps).
- IFC is working on a 3y FRN via BofA, BMO and WFS. Aaa/AAA. Price talk: SOFR + 28bps area.
- Truist Financial priced a $1.5bn 6y NC5 and $1.5bn 11y NC10 bonds at around Treasuries +155 and 185bps. Leads are Barclays, MS and TSI.
- Keybank priced a $500m 3y and $1bn 10y bonds at Treasuries +83bps and +153bps. Leads are DB, JPM, Keybank and MS.
- Autozone priced a $450m 5y and $550 10y benchmark via WFS, BofA, JPM and TSI. Baa1/BBB/BBB. Priced at: +90bps, +125bps.
- Procter & Gamble priced a $650m 3y, $600m 5y and $850m 10y bonds at Treasuries +23bps, +35bps and 53bps. Leads are Citi, GS and MS.
- State Street priced a $500m 3NC2 and $750m 11NC10 benchmark via BofA, GS, MS and SIEWL. A1/A/AA-. Priced at +62.5bps, +130bps.