USD Swaps: USTs knocked around by mixed data; 2y auction preview

Candle chart 1 Jun 2021
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USTs have been knocked around by mixed data and are currently bull-flattening after a weak Richmond Fed. JP Morgan previews today’s 2y note auction.

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  • USTs knocked around by mixed data; 2y auction preview

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    USTs knocked around by mixed data; 2y auction preview

    Treasuries started to slip after a big improvement in Philly Fed (-6.5 versus -17.1 prior) and some slightly stronger PMI data hit the tape this morning (S&P manufacturing PMI 46.8 versus 46 Bloomberg consensus).  However, the subsequent much weaker-than-expected Richmond Fed data (-11 versus -5 Bloomberg consensus) has turned the tide back in the favor of the bond market bulls.

     

    Indeed, the benchmark 10y note yield is last 3.5bps lower at 3.475% after brief pop above 3.55% earlier. Meanwhile, on the curve, the rally has shifted the curve into flattening mode with the 5s30s spread 1.6bps narrower at 4.2bps after hitting an overnight high of 7.5bps. Further in, red and green Eurodollars are also in correction mode with 3.5 to 5 tick gains chalked up today after three consecutive sessions of selling off.

     

    In swaps, spreads remain modestly tighter at the front-end today while longer tenors are better bid as the spread curve steepens against the bull-flattening in underlying rates amid below-average SOFR volumes overall. In the backdrop, another slate of IG deals has lined up for credit-hungry investors as risk sentiment has steadily improved off earlier lows in the backdrop (Dow +0.07%, S&P -0.16%, Nasdaq -0.04%). 

     

    Ahead, in supply, Treasury will kick off this week’s coupon auction cycle with today’s $42bn 2-year note auction, unchanged in size from last month.  While strategists at JP Morgan remain bearish on duration overall, they see no indigestion coming from today’s supply.  The bank expounds on its view below:

     

      ”…. The December 2-year auction cleared at 4.373%, 2.4bp through pre-auction levels , the largest stop through on record. End-user demand increased by 1.5%-pts to 80.9%, as foreign demand rose to 20.1%.

       

      “…Two-year yields are 13bp lower since the December auction and OIS forwards imply a terminal Fed funds effective rate just below 5%, in line with our expectations for two consecutive 25bp hikes at the next FOMC meetings. The WI roll opened at -5.5bp, in line with our estimate, and has narrowed 0.75bp since, well in excess of the erosion of carry over the WI period.

       

      “…Supported by a backdrop of softening data, market expectations of future Fed hiking has remained rather fixed, despite a pushback by Fedspeak, and the associated increased duration demand alongside weak liquidity has led to exceedingly robust auction processes YTD.

       

      “…While we believe the recent bullish sentiment has run ahead of fundamentals and remain tactically bearish on duration, we think this supply should be easily digested: duration demand remains strong as market consensus builds that we are reaching the end of the tightening cycle.”

     

    Currently, SOFR swaps – 2s -2.375bps (-0.625bps), 3s -13.75bps (unch), 5s -24bps (-0.375bps), 7s -31.625bps (-0.375bps), 10s -31.875bps (+0.25bps), 20s -60.125bps (+1.25bps), 30s -68.125bps (+1bps).

     

     

     New issues

     

    • Colombia is working on an 11y benchmark via BBVA, ITAU and JPM.  Baa2/BB+.  Price talk: 8% area.

       

    • Bank of Nova Scotia is working on a 3y fixed/FRN and 7y benchmark via DB, BofA and Scotia.  A2/A-/AA-.  Price talk: +115bps area, SOFR equivalent, +160bps area.

       

    • BNY Mellon is working on a 6NC5 and 11NC10 benchmark via Barclays, BofA, BNYM and UBS.  A1/A/AA-.  Price talk: +125bps area, +155bps area.

       

    • Ashead Capital is working on a long 10y benchmark via BofA, Citi and JPM.  Baa3/BBB-/BBB.  Price talk: +240bps area.

       

    • New York Life is working on a 10y FA-backed 10y deal via Citi, JPM and MS.  Aaa/AA+/AAA.  Price talk: +140bps area.

       

    • MTB plans USD 3y, 5y and 11y NC10 bonds at around Treasuries +115, 145 and 190bps, respectively. Leads are Barclays, BofA (B&D) and MS.

       

    • IFC priced a $600m 3y FRN Global via BofA, BMO and WFS. SOFR +28bps.