USD Swaps: Car crash looming for CPI? 30y falls flat

Crash car 13 Jun 2022
Calm markets allowed 10s/30s to re-flatten in a small way after yesterday's soft 30y auction. With CPI looming, traders eye car prices.

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  • Car crash looming for CPI? 30y falls flat

  • Deutsche: Fed funds rate to peak above 5.1%?

  • New issues


    Car crash looming for CPI? 30y falls flat

    Swappers in London today reported on a normally quiet Friday trading session in USD rates thus far with some receiving flows in swaps between 5y and 10y at what are close to post-Christmas high levels  and also some buying interest in 12m to 2y bills. In spreads, 5s are around -22.75bps and 10y are -29.75bps, both just off session tights after narrowing sharply yesterday.  


    One such swapper said today that as far as the T-bill buying is concerned, “that area is now around 4.85% which is always an attractive buying level for certain clients irrespective of the prevailing Fed sentiment.”


    Elsewhere the trader reflected on yesterday’s weak 30y UST auction, which followed Wednesday’s strong 10y sale. “The yield curve is at its most inverted for years (since the 1980s according to Bloomberg) and the 30y sector was just seen as too expensive on the curve. The 3bps tail was a bit of a surprise but the fact that it tailed isn’t.” 


    Currently the 30y benchmark UST is +3bps at 3.77%, staging a modest curve fightback versus 10y, which is +3bps at 3.69%, while the 2y is +2bps at 4.49%.


    But most minds are on next week. The above trader said that “everything is about CPI. It’s impossible to call of course but there is a fair bit of chatter about the Manheim (used car sales) index which has caught the eye by ticking quite a bit higher (it came in yesterday at 224.8 for January, up 2.5% from December). Some see that as a possible indicator of upside surprise.”


    January CPI is expected to drop from 6.5% in December to 6.2% when it is published on Tuesday, according the the Bloomberg survey. In the reset market, NSA CPI traded up to 6.200293% yesterday but has edged down to 6.19674% and 6.18462% today - see the Total Derivatives SDR


    Deutsche: Fed funds rate to peak above 5.1%?  

    Markets have rallied sharply after Chair Powell’s comments over the past two weeks, note strategists at Deutsche Bank in their latest look at US rates, Deutsche asks, but are they right to do so?


    It says that “among the reasons cited for this response was the fact that Powell has not actively pushed back on the recent easing of financial conditions. Whether or not the Fed has tightened financial conditions sufficiently to bring inflation down to target over time has been a consistent focus of our research agenda.”


    Deutsche argues that “bank lending conditions matter and noted that said that the impact of Financial Conditions Index (FCI)  tightening on growth was reasonably stable until the pandemic." In addition, “although tighter FCIs are currently a meaningful drag on growth, absent any further tightening, the impact could turn more neutral in the second half of this year.”


    “Ultimately,” it concludes, “if the Fed wants to deliver a 'sufficiently restrictive' stance to keep growth well below potential over the coming quarters, our results indicate they will need to ensure that financial conditions remain tight and do not ease too quickly. Given recent experience, delivering this outcome for financial conditions could well require a higher terminal fed funds rate than our current baseline of 5.1%.”


    New issues   

    • Westpac New Zealand last night priced a $750m 5y. Leads BofA, Citi, HSBC, JPM and Westpac.  A1/AA-/A+. +105bps.


    • Greensaif Pipeline yesterday priced a three tranche bond issue consisting of a $1.5bn  10y Sukuk bond at +200bps, a $1.5bn straight Feb 2042 at USTs +275bps and a $1.5bn 2038 Formosa tranche at +245bps. Via BNPP, Citi, HSBC and JPM.