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Data challenges hard landing narrative; 7y ahead
Today’s Treasury market sell-off has gathered more steam as the solemn fact that today’s batch of better-than-expected data (i.e. GDP, jobless claims, durables, new home sales) flies in the face of the 2023 rate cut/hard landing narrative.
Accordingly, yields have been jacked up 5-8bps with the belly underperforming. The benchmark 10y note yield is last 7bps higher at 3.511%, the 5s30s spread is 0.7bps narrow at 3.75bps, and further in red and green Eurodollars are 6.5 to 10 ticks softer as Fed cut bets get dialed back a bet.
Similarly, the major domestic equity indices are well off their opening highs with the bourses now mixed but little changed (Dow -0.12%, S&P +0.08%, Nasdaq +0.49%) though Tesla is a shining beacon today as it posts 12% gains after decent 4th quarter results.
In swaps, spreads are mixed with the spread curve steepening amid the bear flattening in underlying rates amid below-average SOFR volumes overall. In the backdrop, IG issuance remains sparse this session with only a handful of deals (i.e. Norfolk Southern, US Bancorp, Kinder Morgan) after just over $20bn (ex. SSA) has already priced this week.
Ahead, Treasury wraps up this week’s supply cycle with today’s $35bn 7y note auction after both of this week’s $42bn 2y note and $45bn 5y note auction were met with solid demand. Today’s 7y auction is unchanged from last month where the December auction cleared 1.1bp cheap to pre-auction levels as the share of end-user demand increased 5.6%-pts to 84.2% and auction allotment data showed that the increase in end-user demand was attributed to the 9.0%-pts increase in foreign investor takedown to 19.8%, strategists at JP Morgan highlight.
Heading into today’s supply, JP Morgan has mixed views overall and believes that the sector may need to cheapen up for the auction to clear smoothly. JP Morgan expounds on its view below:
- ”… Since the last auction, 7-year yields have declined 41bp, and intermediate Treasuries have richened in excess of fundamental drivers.
“…Along the curve, the 7-year sector appears slightly rich versus the wings after adjusting for the level of yields and the shape of the curve. The WI roll opened at -0.75bp, in line with our forecast and has since cheapened to -0.38bp, roughly in line with the erosion of carry.
“…So far in 2023, Treasury auctions have been exceedingly well received:…with only (today’s) auction to go, so far in January, auctions have on average stopped 1.7bp through pre-auction levels. Historically, Treasury auctions tend to be well received in January, but certainly not to the extent seen so far this month.
“... Overall, while the strength of year-to-date auction results poses a risk that the auction stops through, the richness of intermediate Treasuries suggests that the auction is likely to require some concession from current levels in order to be absorbed smoothly.”
Currently, SOFR swaps. – 2s 2.5bps (-0.875bps), 3s -12.75bps (-0.125bps), 5s -21bps (unch)*, 7s -2.25bps (+0.5bps), 10s -30.375bps (+0.625bps), 20s -59.625bps (+0.25bps), 30s -66.25bps (+0.875bps).
* adjusted for the 2bps give.
Formosas & ZC callables
- Credit Agricole sold a $10m 10y NC1 zero coupon callable (non-Formosa). The EMTN matures Jan 2033 and is callable annually starting Jan 2024. Self-led. Estimated IRR 6.15%. Announced Jan 25.
- Norfolk Southern is working on a 10y benchmark via Citi, GS and USB. Baa1/BBB+. Price talk: +125bps area.
- US Bancorp plans USD 6y NC5 and 11y NC10 bonds at around Treasuries +135 and 165bps. Leads are Barclays, Citi and USB.
- Kinder Morgan (Baa2/BBB) is preparing a USD 10y at around Treasuries +205bps. Leads are Barclays, JPM, PNC and Scotia.