USD Swaps: Risk in the tails; Fed reassures longs
Tails and the unexpected
The Treasury curve has pared early gains with the 5y back to 3.49% (unch) ahead of the employment report although stock futures remain in the red led by at 1.2% fall in the Nasdaq following disappointing results yesterday from Apple, Amazon and Alphabet. That dashed some of the optimism generated by Meta results and yesterday’s 3.3% surge in the tech-heavy index.
Consensus for non-farm payrolls today is +188K versus the +223K outturn for December, while average hourly earnings are seen slowing by 30bps - at least on an annual basis - to 0.3%/4.3% from 0.3%/4.6%.
Dealers yesterday judged that it would take an “outlier” somewhere in the jobs data to move the market but considered that the pressures in the labor market would take time to filter into the numbers. This month, Citi and Goldman Sachs are the outliers in the upper tail of the forecast distribution with NFP guesses of +305K and +300K, respectively, according to Bloomberg’s survey. In contrast NatWest and Mizuho are among the lowest at +150k and +160K respectively.
In swaps, spreads are mostly tighter with 5s at -20.50bps (-0.50), 10s at -28.75bps (-0.50) and 30s at -63.25bps (unch). IRS volumes are above normal for a Friday, led by the 30y bucket.
BofA: Stay in steepeners and receive Mar23 FOMC OIS
Ahead of today’s data dump (which includes the ISM Services index, seen rising to 50.5 from 49.2), strategists at BofA judge that the tone of this week’s Fed meeting supports a “long duration bias” and opens the way to data-dependent hikes by the FOMC in future. BofA continues:
- “The FOMC & Feb refunding keep us comfortable with our prevailing market views. Duration = long duration bias, trade 10s tactically between 3-3.5% until more macro clarity. Curve = we are constructive on 2s/10s bull steepening. Steepening will be led by 2Y rate decline and will be catalyzed by signs of labor market moderation. Direction is clear but timing is not. We encourage clients to move into spot 2s/10s steepeners…(TBAC suggests) buybacks are coming post debt limit & will limit extent of RV dislocations.”
And before the employment report, the bank likes receiving Mar FOMC OIS with a pause next month seen as “much more” likely than a 50bps hike:
- “The BofA house view is for a Mar hike, but we think the market is too confidently pricing this outcome & risks looks asymmetric (probability of pause much higher than 50bp hike). We target 4.6% with a stop at 4.9%. Risk is for strong data & a 50bp Fed hike in Mar.”
“(Fed) guidance around ‘ongoing’ hikes + data dependence will leave the market balancing the desire for additional hikes with the possibility of a pause at any time. We think the market should now see every meeting as a 50/50 coin flip until data prove otherwise. From this perspective, the market appears too confident in a March hike.”
- National Rural Utilities yesterday priced a $1.1bn 3-part (a $600m 3y, a $200m 2028 tap and $300m 2033 tap). Leads are Mizuho, PNC, RBC and Scotia. A2/A-. +70bps, +95bps and +123bps.
- Uniti Group yesterday priced an upsized $2.6bn 5y NC2.5 secured (B2/B) at 10.5%. Leads are Barclays, BofA, Citi, DB, GS, JPM, MS, RBC, TD.