USD Swaps: USTs pare losses; Pre-Fed positioning, trades

Chart 24 Nov 2021
USTs pared early losses after the PCE deflator slowed as expected. Banks look at positioning and suggest front end trades ahead of the FOMC.

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  • USTs pare losses, spreads steady

  • Pre-Fed positioning: Barclays

  • Trades for the March-May meetings: Citi

  • New issues


    USTs pare losses, spreads steady

    Treasury yields are just off the week’s highs following near-consensus PCE data with the core deflator slowing again to 4.4%. The 10y  tested 3.56% before edging down to 3.53% (+3bps) at the time of writing, with 10s/30s a couple of bps flatter.  European fixed income is down (see Total Derivatives) risk assets are just in the red with S&P futures -0.3%.


    At the front end, SOFR futures are little-changed in the whites and 3-6bps lower in the reds and greens while swap spreads are narrowly mixed with 5s at -21.50bps (unch), 10s at -30.50bps (-0.125) and 30s at -65.75bps (unch). Swap volumes are below-normal for a Friday for most buckets.


    Pre-Fed positioning: Barclays

    How are investors set up for the FOMC? Barclays today suggests that positioning appears “mixed” with the bank’s model-based estimates suggesting CTA/hedge funds have increased their short duration exposure. However, the bank adds that they are “not as short as implied by other indices such as the CFTC data, because activity in futures also reflects relative value trades such as cash/futures basis or invoice spreads, and not just duration.


    In contrast, Barclays reckons that fixed income bond funds are “slightly overweight their benchmark” but are currently seeing “strong” inflows of $28bn for the year to date as investors start to look to the beginning of the easing cycle.


    Trades for the March-May meetings: Citi  

    Elsewhere, Citigroup recommends a trade for the Fed meeting in the very front of the curve based on a 25bps hike in March and a pause in May. It writes:   


      “We like a Feb- Mar equally weighted steepener coupled with a Mar-May flattener weighted 1:0.3.”


      “Given that the Feb/Mar OIS curve is currently at 20.5bps, the front-end steepener could make 4.5bps of profit if the Fed hikes 25bp in March. Because of the lower weights on the Mar/May flattener, our net P&L would likely still be flat if the Fed hikes 25bp in both March and May. The trade would likely make 7.5bp if the Fed hikes in March but does not in May, which is our target with a stop of -5bp.”


      “The risk is if the Fed does not hike in either March or May, in which case the trade would likely lose 17.5bp. We see no hike in March as unlikely given that a no hike this early would likely result in the market accelerating rate cuts and disrupting the Fed’s plan to hold rates at elevated levels for longer.”


    New issues   

    • US Bancorp  yesterday priced a $3.65bn 2-part ($1.65bn 6y NC5 and $2bn 11y NC10). Leads are Barclays, Citi and USB. +103bps and +133bps.