USD Swaps: USTs cower in the shadow of strong data; 2s5s10s fly cheapening

Smash break 6 Dec 2021
Better-than-expected PMI data put UST under renewed pressure today with a sharp rise in yields. Citigroup eyes 2s5s10s fly cheapening.

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  • USTs cower in the shadow of strong data; 2s5s10s fly cheapening

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    USTs cower in the shadow of strong data; 2s5s10s fly cheapening

    Today saw a renewed surge in Treasury yields as the market continued to cower in the shadow of a raft of better-than-expected data in the face of an ever data-dependent Fed.  The most recent point of reference came with this morning’s stronger than expected PMI data (i.e. S&P manufacturing, services and composite PMIs) which came on the heels of UK data that also included stronger-than-expected PMIs as well as better-than-expected German ZEW Survey Expectations that sent bonds tumbling across the Atlantic today.


    Against this backdrop, Treasury yields are poised to close out today’s session a solid 10-15bps higher – making Friday’s modest rally another head-fake in a decidedly bearish turn to the market of late.  The benchmark 10y note yield is last 13.6bps higher at 3.951% - a new 2023 high water mark – with the next big line in the sand seen at 4.25%, sources say.  On the curve, the belly is bearing the brunt of today’s sell-off with the 5s30s spread 3.8bps narrower at -20.2bps while the 2s5s10s fly is 4.85bps cheaper at -33.9bps (see Citigroup trade below).


    Further in, red and green SOFR futures have been clocked to the tune of 14.5 to 15.5 ticks as a more aggressive Fed gets priced in with the OIS market now seeing 25bps hikes in March, May and June.  Meanwhile, SOFR swaps are mixed with belly spreads underperforming as the belly of the UST curve gets annihilated.  Overall, swap volumes saw a decent jump in the 2y, 5y, 7y, 10y and 30y points amid today’s outsized rate move and a resurgence in IG issuance this session (see below) – the latter notably coming despite plunging equity valuations today (Dow -2.06%, S&P -2%, Nasdaq -2.5%).


    More broadly, with this week’s sell-off in rates, strategists at Citigroup have shifted their duration bias from short to neutral.   However, on a more granular level, the bank likes positioning for a cheapening of the 5y point relative to 2s and 10s on the curve.  Citigroup expounds below:


      ”…This works well in a scenario where rate cuts are priced out because the economy is strong and inflation continues to moderate. A historical analogy is the second quarter of 2007 when core CPI at the time was falling, having peaked at close to 3% in Sep-06 (after the Fed had finished hiking rates) and was around 2.5%. The pricing of a hard landing scenario where the Fed has to keep tightening beyond 5.25/5.5 would be the risk to the trade because in that scenario 2s5s would flatten again similar to 2022. We don’t think that this is the scenario we’re poised to enter over the next couple of quarters, despite the growing fear of a 2022 redux. We like this construct also because the correlation of the fly to 2s10s slope has dropped recently, and if that continues, 5s can underperform even if 2s10s flattens.”


    Currently, SOFR swaps – 2s 6.5bps (+0.75bps), 3s -6.225bps (+0.5bps), 5s -21bps (-0.125bps), 7s -30.5bps (-0.75bps), 10s -27.875bps (+0.375bps), 20s -59.625bps (+0.125bps), 30s -68.5bps (+0.375bps).



    New issues

    • OKB is working on a $1bn 5y deal via BofA, DB, JPM and RBC.  Aa1/AA+.  Price talk: MS + 39bps area.


    • Mizuho launched a 3-part $1bn 6.25NC5.25, $700m 8.25NC7.25 and $900m 11.25NC10.25 benchmark via MIZ and BofA. Launched at +150bps, +165bps, +180bps.


    • Consolidated Edison priced a $500m 10y deal via CIBC, JPM, Scotia and WFS.  Baa1/A-/A-.  Priced at +125bps.


    • Ryder priced a $500m 5y benchmark via BofA, BNPP, MIZ, RBC and TSI.  Baa2/BBB/BBB+.  Priced at +153bps.


    • Rabobank priced a $1bn 6NC5 benchmark via Barclays, GS, HSBC, JPM, MS and RABO.  A3/A-/A+. Priced at +140bps.


    • Constellation Energy Generation LLC priced a $750m 5y and $600m 10y benchmark via Barclays, BNPP, MS and BNS.  Baa2/BBB.  Priced at +143bps and +185bps.


    • CenterPoint Energy Resources priced a $600m 5y and $600m 10y benchmark via MIZ, Scotia, TD, TSI and USB.  A3/BBB+/A-.   Priced at +115bps and +145bps.


    • Mitsubishi HC Finance America LLC priced a $500m 10y benchmark via MS, Citi, JPM and BofA.  A3/A-.  Priced at +170bps.