USD Swaps: Fed talk sees USTs grinding into weekend

Fed sign 25 Mar 2021
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Hawkish Fedspeak this week and a run of bearish data were helping UST yields grind higher into the three-day weekend, according to traders today.

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  • Fed talk sees USTs grinding into weekend

  • SocGen: Upwards pressure on yields to persist

     

    Fed talk sees USTs grinding into weekend

    A pair of hawkish comments yesterday from a pair of hawkish Fed officials – Mester and Bullard – today extracted what swappers today implied was a mechanical  rather than, enthusiastic reaction from the USD fixed income market, with 10y yields obligingly rising about 3bps to 3.89% at the time of writing, having earlier hit a 2023 high of 3.925%. At the front end, SOFR futures are as much as 9bps lower in the reds, and 4-8bps weaker in the whites with 25bps hikes priced for the next two meetings. 

     

    One swapper said this lunchtime in London that “there’s been a general grind higher in terms of rate hike expectations, despite the fact that data hasn’t been overly-bearish,” although strategists at SocGen argue below that the data has been somewhat bearish, if not overly so.

     

    The trader said that conditions are thin, calm and lackluster today, with the looming three-day US weekend very much on people’s minds, especially in the absence of significant data releases today. However, despite the apathetic trading conditions the above swapper conceded that “the market couldn’t ignore last night’s comments and it is fair to say that 50bps (of hike at the March FOMC meeting) is back on the table.”

     

    On the curve today the fashion everywhere was for bear-flattening, with Treasuries setting the tone as a pop in 2y yields flattened 2s/10s by 2bps while 10s/30s flattened a bp. And in swap spreads today, most are flat or a touch more positive apart from the 2y which is -0.75bp at 6.50bps. The 5y is currently +0.25bp at -20.5bps, 10y is +0.25bps at -27.75bps and the 30y is unchanged at -68.25bps. 

     

    SocGen: Upwards pressure on yields to persist into March

    Zoning in on the persistent hawkish moves that have seen yields rise steadily since Monday morning, strategists at SocGen today predicted that this directionality will persist until at least the start of next month. SocGen said this morning that “the view that the Fed would not revert to raising rates in 50bp increments was challenged by Mester and Bullard yesterday. This will keep pressure on Treasuries at least until the next NFP and CPI reports in March and will underpin the dollar.”