USD Swaps: Spanish surprise lingers for USTs; Swap steepeners eyed; Refunding

Bond chart 30 Jan 2023
USTs never recovered from the early Spanish inflation surprise. NatWest looks at special Refunding topics. JPM eyes forward swap steepeners.

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  • USTs can’t shake off Spanish surprise; Forward swap curve steepeners eyed

  • NatWest: Special Treasury Refunding Topics

  • New Issues


    Click here for SDR USD IRS trades.


    USTs can’t shake off Spanish surprise; Forward swap curve steepeners eyed

    A rather busy week for market participants that will incorporate (1) an FOMC decision, (2) the latest employment report and (3) earnings releases for the F.A.N.G. Gang kicked off with a modest risk-off tone this session as heavy tech shares weighed on the broader risk markets all day (Dow -0.77%, S&P -1.30%, Nasdaq -1.96%).  “The January rally hit a snag and likely won’t resume in earnest until we hear from the Fed,” one source reckoned.


    Meanwhile, the Treasury market was never able to shake off its funk after the Spanish inflation surprise this morning (see Total Derivatives) as yields remained 3-6bps higher with the belly remaining the weakest link on the curve this session.  Heading into the close, the benchmark 10y note yield last up 4.1bps at 3.544% while the 5s30s spread is 2.75bps narrower at -2.3bps.   Shorter in, red and green SOFR futures are closing out 7.5 to 9 ticks softer with all eyes on FOMC Wednesday where a 25bps hike is baked into the cake – at least in the screens.


    In swaps, spreads widened off their early session tights to end narrowly mixed amid below average SOFR volumes, best seen at the 5y and 30y points.  In the backdrop, a batch of IG deals lined up at the gates today with a $3.35bn 4-part deal from IBM and a $2.6bn 3-part deal from Elevance leaving the biggest footprints.  In all, syndicate desks look for roughly $20-$25bn in new IG deal flow this week, with supply likely limited to today, Tuesday and Thursday given the FOMC decision on Wednesday and payrolls print on Friday.


    Separately, on the swap curve, strategists at JP Morgan find value in 5Yx5Y / 1Yx15Y swap curve steepeners, because of the following supportive factors:


      ”…First, this curve has been fairly stable and mean reverting over much of this hiking cycle and is now below its average level, which makes for attractive entry levels.


      “…Second, we have often noted that the forwards in the Reds sector are pricing in too much easing, which is at odds with the Fed's clear messaging that leans against premature easing expectations. As we head towards (this) week's FOMC meeting and the Fed-speak that will likely follow, we favor low-beta ways of gaining exposure to a correction in those forwards. This curve has exhibited a 4% beta to the 1Yx1Y swap yield, which is now pricing in over 140bp of easing from the cycle peak, and we see room for a correction in the near term.


      “…Last but not least, carry on steepeners in this sector is positive, at 5bp over 3 months… We anticipate the environment in 2023 to turn favorable for carry trades as the Fed slows down. With the Fed expected to slow its pace to 25bp at the upcoming meeting, we think this is an opportune moment to enter such carry trades.”  


    Thus, JP Morgan recommends “initiating 5Yx5Y / 1Yx15Y forward swap curve steepeners.”


    Currently, SOFR swaps – 2s 2.5bps (+0.625bps), 3s -11.875bps (+0.125bps), 5s -21.375bps (-0.125bps), 7s -30bps (+0.25bps), 10s -29.625bps (+0.375bps), 20s -57.75bps (+0.25bps), 30s -75.75bps (-0.25bps).



    NatWest: Special Treasury Refunding Topics

    Strategists at NatWest expect “no changes in auction sizes at the refunding announcement  (this) week (Wednesday, Feb 1, 8:30am)” as they find that “at this point, it does look like Treasury has brought down auction sizes to levels more in line with their relatively lower funding needs.”  However, while the issuance announcements are unlikely to excite, NatWest believes that two of the special topics that Treasury has asked primary dealers about in the recent surveys are worth discussing. Last quarter, Treasury collected opinions on buybacks and this quarter it was on how to achieve more transparency within the Treasury market:


      ”…Buybacks. We do not think February will be the refunding meeting where a buyback announcement will be made. We think it is unlikely for Treasury to implement a major decision so quickly, particularly without a trigger from a market event that requires immediate attention. Chart 5 below from Under Secretary for Domestic Finance Nellie Liang’s presentation in November last year illustrates the clear relationship between the illiquidity in markets and the high levels of volatility, particularly in the front end of the curve. The front end was most directly subject to the monetary policy tightening, which occurred at a very rapid pace over the past year. We expect the Fed to reach its rate hike peak soon and with the rate of tightening decelerating significantly, liquidity in the market should improve. Therefore, we think a decision for buybacks might not come at all as it might be too late (and perhaps unnecessary) to implement that program around the middle of the year.


      “…Information dissemination. Treasury asked dealers their opinions about releasing market data on a timelier basis (daily, with opinions on potentially every 60 minutes). While we see the appeal of more transparency in the Treasury market for analysis purposes, we do fear that sharing data on a higher frequency basis could become too much of a good thing. To structurally improve market liquidity, letting investors know that markets might not be as deep at any given point could beget more illiquidity. Additionally, higher frequency information dissemination could obstruct investors with large amounts of volume to execute by signalling their intention to the market. While Treasury did propose having caps above which some details of the transaction would be masked, this might be difficult in the less liquid off-the-run securities. In summary, we do see the appeal of more information, particularly from analyst’s standpoint, but do think caution is necessary to avoid unintended consequences.”



     New issues

    • The Central American Bank for Economic Integration (CABEI) plans a USD 3y Social Bond at SOFR +130bps or so via BNPP, BofA, Credit Agricole and HSBC (B&D).


    • Bank of New Zealand launched an $850m 5y at USTs +118bps via Citi, JPM, NAB, Lendlease Corp and RBC. 


    • Corp Nacionale del Cobre de Chile priced a $900m 10y deal via BNPP, BofA, Santander and Scotia.  A3/A. Priced at +158bps.


    • IBM priced a 4-part $850m 3y, $1bn 5y, $750m 10y and $650m 30y benchmark via MUFG, BofA, Barclays, Citi, GS, JPM, MIZ and TD.  A3/A-.  Priced at +60bps, +85bps, +120bps, +145bps.


    • Elevance priced a $500m 3NC1, $1bn 10y and $1.1bn 30y benchmark via Barclays, GS and JPM.  Baa2/A/BBB.  Priced at +97bps, +122bps, +147bps.


    • Tyco Electronics priced a $500m 3y deal via Citi, BofA and JPM.  A3/A-/A-.  Priced at +60bps.


    • Constellation Brands priced a $500m 3NC1 benchmark via BofA, GS and JPM.  Baa3/BBB.  Priced at +110bps.


      For a complete review of IG issuance over the past week, please see Total Derivatives.