USD Swaps: Rally fades; Capped by supply

Line chart 25 Mar 2021
USTs came off the earlier highs, with some selling pressures likely related to corporate supply pricing. TBAC discussions examined.

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  • Rally fades; Capped by supply

  • TBAC discussions on buybacks, auction frequency, OTR -JP Morgan

  • New issues


    Rally fades; Capped by supply

    Treasuries are off the earlier highs are now only up to 2bps lower on the day, with the gains led by the back end of the curve. “Yesterday you saw the rally caps put on, but I think we trade in a range now,” opined one trader, who also noted that issuance pricing likely was a factor in the fading of the rally this afternoon. And with non-farm payrolls tomorrow, the source judged that it would take an “outlier” to move the market and considered that the pressures in the labor market would take time to filter into the data.


    The 10y note yield is last 1.5bps lower at 3.402% while 2s10s is 0.2bps lower at -70bps. Looking at the price action in bunds today, one source believed it to be the case “of being more hawkish and thus introducing more recessionary risk and thus the big rally.” With the potential of more recessionary risk across the pond, a source considered that could feed into the US economy and raising the potential of a harder landing as a result. Elsewhere, equities ended with strong gains in the tech sector (DJIA -0.12%, S&P +1.15% and Nasdaq +3.25%).


    Meanwhile, looking ahead, the next set of auction supply (3y, 10y and 30y) is quickly up to bat next week, and a source wondered if the market would want to take that down at the recent highs, and thus considered that the bond rally could “stall at these levels.”


    As for swap spreads, the spread curve steepened out with long end spreads widening out further while front end spreads lagged and belly spreads widened out a touch amid mostly low volumes. IG supply restarted today after a two day hiatus and $10.45bn priced, led by a $5.25bn 4-part by Oracle. Most of the supply today were not swap candidates and thus had little impact on spreads.  


    Currently, SOFR swaps 2s +2.75bps (unch), 3s -10.875bps (unch), 5s -19.875bps (+0.75bps), 7s -28.25bps (+0.375bps), 10s -28.375bps (+0.625bps), 20s -55.875bps (+1.375bps), 30s -63.125bps (+2bps).



    TBAC discussions on buybacks, auction frequency, OTR -JP Morgan  

    Delving into the TBAC discussion related to Treasury market structure and liquidity released earlier this week,  JP Morgan notes that the TBAC presenter on potential buybacks spent “significantly more time” on cash management aspects, “arguing that buybacks could smooth large variations in receipts and outlays throughout the year and reduce the volatility of T-bill issuance, and offered evidence of other sovereign issuers that regularly conduct buybacks, largely concentrated in the front end of the curve (predominantly debt with less than 1.5 years to maturity).”


    The presenter argued that buybacks in the securities maturing in less than 1 year and greater than 1 year “should be considered separately” given the replacement funding impact on bills and on-the-run coupons, respectively, and “interestingly, the charge seemingly makes the case more strongly that buybacks are a strong tool for cash management purposes, given the global precedent, that it could free up dealer balance sheet by swapping out financing intensive short coupons for T-bills.”


    On the other hand, JP Morgan finds that the case for buybacks of intermediate- and long-end Treasuries is “more complex and poses more risk for Treasury.” Overall, the TBAC member argued Treasury should consider buybacks, “but that still more analysis needs to be done, and seemingly that the cash balance lens might be easier to get operational than the buybacks to support liquidity.”


      Overall, JP Morgan assess that a buyback program would need to be “regular and predictable, but also be flexible to respond to changes in liquidity conditions across the curve, and a framework of using market depth, RMSE and dealer positions across sectors could be a way to identify candidates for buybacks.”


      Given that there have been two topics on this charge question in the last year, and that Treasury asked dealers a detailed line of questioning on this topic in the fall, JP Morgan continues to think buybacks at some point “will come to fruition, but any facility is still months away.” Moreover, the bank judges that “it’s likely any facility is small in size at onset, and may be more focused on cash management than liquidity enhancement.”


    Separately, on the topic of moving 2y, 3y, 5y, and 7y nominal Treasuries to one quarterly new issue with successive reopening, “overall, dealers had mixed views on this proposal as well, but in the minutes, TBAC members were seemingly warm towards this potential change, and suggested further study would be beneficial.” JP Morgan believes that liquidity benefits of such a move are not clear and that larger-sized off the runs “could result in reduced liquidity, but that there are serious operational reasons why this makes sense, as it could help reduce the intra-quarter lumpiness in Treasury’s maturity schedule over time”:


      “Since the liquidity perspectives were mixed but there are other reasons why making the auction calendar change makes sense, it seems likely Treasury will move forward with this initiative, but not before later this year,” JP Morgan assesses.


    Lastly on the topic of the dissemination of transaction data for secondary market on-the-run nominal coupons, Treasury found that most primary dealers supported a gradual approach for additional transparency for on-the-runs, and JP Morgan agrees:


      Overall, the bank views that “some of the differences in primary dealers’ views highlight uncertainty around the impacts of this new proposal, which we believe further supports the case for Treasury to start conservatively and stay attentive to changes in market liquidity before moving to larger caps and faster dissemination.”


    New issues


    • Ellington Financial is working on a $100m $25 par Perp via Piper Sandler. A-.  Price talk: 8.625%.


    • National Rural Utilities launched a $1.1bn 3-part (a $600m 3y, a $200m 2028 tap and $300m 2033 tap). Leads MIZ, PNC, RBC and Scotia.  A2/A-.  +70bps, +95bps and +123bps.


    • Oracle priced a $5.25bn 4-part ($750m long 5y, $750m long 7y, $1.5bn 10y and $2.25bn 30y). Leads HSBC, BofA, Citi, GS and JPM.  Baa2/BBB/BBB. +105bps, +125bps, +150bps and +200bps.


    • Alexandria Real Estate priced a $1nm 2-part ($500m 12y green and $500m 30y). Leads BofA, Citi, GS and RBC.  Baa1.  +137.5bps and +160bps.


    • MPLX priced a $1.6bn 2-part ($1.1bn 10y and $500m 30y). Leads MUFG, BofA and JPM.  Baa2/BBB/BBB.  +170bps, +210bps.


    • PNC Financial priced a $1.5bn PerpNC7 deal via BofA, Citi, JPM, MS and PNC.  Baa2/BBB-/BBB.   6.25%.