USD Swaps: Dovish double whammy; Rate market outlook post FOMC
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Dovish double whammy; Rate market outlook post FOMC
The BOE is the latest central bank to jump on the ‘dovish hike’ bandwagon on the heels of Fed Chair Powell’s – albeit potentially inadvertent – similar hike yesterday. And in the wake of this dovish double-whammy, rates across the pond have come crashing down (up to 40bps in some EGBs) - despite a less dovish 50bps hike by the ECB today - in an one-part ‘catch-up’ move to yesterday’s UST move, and one-part digestion on the latest BOE action.
Treasuries are up once again but in a much more subdued move compared to overseas. The benchmark 10y note yield is last 5.3bps lower at 3.362% while the 5s30s spread is 2bps wider at 7bps. Further in, red and green SOFR futures are another 3.5 to 8 ticks lower while the whites are up to 3 ticks firmer. Meanwhile, swap spreads are mostly wider once again amid yet another drop in underlying rates with activity running at a below-average clip. In the backdrop, IG issuance has started to hit the screens after the FOMC pause while risk assets are mixed in the background (Dow -0.35%, S&P +1.49%, Nasdaq +2.78%).
Elsewhere, banks have already weighed in on what yesterday’s FOMC decision may mean for the nebulous terminal rate (see Total Derivatives), however strategists at HSBC – who now look for one or two further 25pbs hike out of the Fed – delve a little deeper to assess what this may mean for the broader rates market outlook. For this, HSBC considers how much easing is priced into the current yield curve and the potential changes to valuations below:
- ”… The key drivers of the value for different parts of the yield curve today are the level of the peak in the funds rate, the timing and pace of future eases, and the bond market’s expected terminal rate when the Fed begins to ease. The Fed outlook is the key driver of value in the front end of the yield curve.
“…However, for longer maturities, shifts in the market’s long-run Fed outlook are key. For example, the 5y5y Treasury forward jumped over 300bp from its 2020 trough to its 2022 peak. Thus, we think the current 5y5y forward rate, 3.4%, is best viewed as a probability-weighted view a future move to a high, circa 4%, or low, circa 1%, 5y5y.
“…The results of our (most recent) analysis (on January 30th) pointed to a near-term floor for yields in the front end of the yield curve near 4.1% for the two-year note. That’s nearly 100bp below the rate implied by the FOMC’s December dot plot. It is also -100bp below the FOMC’s projected peak funds rate. Historically, when front-end inversions larger than that occurred, the Fed was typically easing aggressively, and it was signaling future eases, not hikes. Perhaps a more dovish market view for the Fed will allow a moderately lower yield floor.
“…For the 10-year note yield, the analysis pointed to a ceiling near 3.9%. Our scenarios that assume a significant slowdown in the economy point to 10-year yields in the 63bp to 225bp range. Thus, such a move would require the Fed to shift to easing.
“…Given the bond math, bearish views are best expressed in the front end of the yield curve, as bonds will both cheapen and roll up the yield curve if the Fed is correct. In turn, bullish views are best expressed in longer maturities. Rolling up the curve is not a major driver of performance there. In turn, the downside is less, based on our Fed rate path scenarios, and the upside is far greater.”
Currently, SOFR swaps – 2s 2.75bps (unch), 3s -10.875bps (+0.125bps), 5s -20.125bps (+0.5bps), 7s -28.25bps (+0.375bps), 10s -28.5bps (+0.5bps), 20s -55.75bps (+1.625bps), 30s -63.5bps (+1.5bps).
New issues
- Oracle is working on a 4-part 5y, 7y, 10y and 30y benchmark via HSBC, BofA, Citi, GS and JPM. Baa2/BBB/BBB. Price talk: +145bps area, +165bps area, +185bps area, +240bps area.
- Alexandria Real Estate is working on a 12y greenb benchmark via BofA, Citi, GS and RBC. Baa1. Price talk: +170bps area.
- MPLX is working on a 10y and 30y benchmark via MUFG, BofA and JPM. Baa2/BBB/BBB. Price talk: +195bps area, +240bps area.
- PNC Financial is working on a PerpNC7 deal via BofA, Citi, JPM, MS and PNC. Baa2/BBB-/BBB. Price talk: 6.625%-6.75%.
- National Rural Utilities is working on a 3y, 2028 tap and 2033 tap via MIZ, PNC, RBC and Scotia. A2/A-. Price talk: +100bps area, +120bps area, +150bps area.
- Ellington Financial is working on a $100m $25 par Perp via Piper Sandler. A-. Price talk: 8.625%.