USD Swaps: BOE peak talk bull-steepens; Banks on Fed

Fed sunny 9 Jun 2022
Hints from the BOE that sterling rates are near their peak helped global fixed income bull-steepen. But banks expect two more hikes from the Fed.

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  • BOE helps USTs bull-steepen

  • FOMC has two hikes left: Banks

  • New issues


    BOE helps USTs bull-steepen

    After digesting the Fed’s slightly mixed messaging on ‘disinflation’, followed by the BOE’s dovish 50bps rate hike this morning (the MPC hinted that rates could be nearing their peak - see MPC statement), global fixed income is bull-steepening led by the gilt market with the future up 175 ticks. 


    At the front end, SOFR futures are unchanged or a bp firmer in the whites after the BOE news (but before the ECB decision), 1.5 to +3.5bps stronger in the reds, and little-changed the greens.


    Further out the curve, UST yields are now 2-4bps lower led by the belly as gilts surge with the 5y at 3.47% (-4bps). Risk assets are also up again with big gains for Meta’s stock helping a 1% rise in Nasdaq futures ahead of the bell. However IG spreads are steady after tightening yesterday and the new issue screens remain quiet so far, with non-farm payrolls due tomorrow. Swap spreads are wider and the spread curve is steeper with 5s at -20.50bps (+0.125), 10s at -28.50bps (+0.50) and 30s at -64.25bps (+0.75). Outright SOFR swap flows are above-average led by the 10y and 30y sectors.  


    FOMC has two hikes left: Banks

    Banks give their takes on yesterday’s FOMC meeting. Most see two more hikes and then a pause:


      HSBC: “The Committee is ‘talking about a couple more rate hikes.’ Our own forecast is that the FOMC will only follow through with one more 25bps rate hike, with risks still skewed towards the upside….We will not know until there is more economic data to evaluate whether the current rate hiking cycle is nearing its conclusion…Bond investors priced in an increased probability of lower future rates on the possibility that the statement signalled a modest tactical shift by the FOMC.”


      BNP Paribas: “Our forecast for a 5.25% terminal fed funds rate is bolstered by the messaging around the February meeting. We continue to anticipate two more 25bp hikes, in March and May, followed by an extended pause through year end.”


      Deutsche Bank: “The next few inflation prints will be paramount for assessing the terminal rate. If, as we and the Fed believe, inflation accelerates a bit over the next few months, the Fed is likely to raise rates through May and deliver a terminal rate of 5.1%...However, if inflation continues to decelerate, with further evidence that the labor market is loosening and growth is moderating, a pause after the March meeting is definitely possible.”


      NatWest: “We continue to project another 50bps more in Fed tightening, bringing the terminal rate to 5.25% in May…Officials will have much more information on inflation, wages, and the labor market (an updated dot plot) to help determine the exact timing to stop hiking rates - whether it is just below 5% or just above 5%...More insight as to the Fed’s thinking will be available from the release of the minutes from the Feb 1 meeting (on February 22) and potentially the semi-annual monetary policy testimony later this month.”


      Barclays: “Powell’s press conference sent mixed messages, reiterating that the committee’s work is not done, but showing a reluctance to lean against easing financial conditions….We continue to expect 25bp hikes by the FOMC in the upcoming March and May meetings, with a pause conditioned on the FOMC seeing evidence that inflation is on course for sustained decline toward the 2% target. In our forecast, this occurs by this spring, which would justify a pause that maintains the funds rate in a target range of 5.00-5.25% into the fourth quarter of this year. We still expect the committee to cut the funds rate by 25bp in the final two meetings of this year, when we expect sufficient slowing in labor demand, and declines in inflation, to warrant some easing.”