USD Swaps: Minutes to show that time passes too quickly

Minutes to show that time passes too quickly

The approach of the FOMC Minutes from its Jan 31-Feb 1 meeting are the market focus today, of course, but strategists suggest that the main value of them will just be to serve as a reminder what an accelerated culture it is that we all live in, just how quickly time moves nowadays.

Way back on February 1, the consensus feeling was that the Fed was shifting in line with the market and the data, the latter of which showed that inflation was slowing faster than expected and that rate hikes must end sooner, rather than later.

Now all the talk is of strong recent data, the need to extend rate hikes maybe to 5.5%, (instead of the short-lived consensus of 5-5.25%) over a longer period before returning to being super data-dependent.   

It is known that a number of the usual suspects in the FOMC voted for a 50bp (to 5%) hike last time, instead of the 25bps hike that was forthcoming, and that there was talk of a possible imminent pause from some doves, it remains to be seen what can come from the FOMC Minutes that can move today’s much less dovish market.

After a sharp sell-off yesterday, UST yields have traded in a fairly loose range so far today, with the 10y yield currently -2.5bps on the day at 3.927%. The 2s/10s and 10s/30s UST curves are both 0.5bps steeper at the time of writing, while in swap spreads, a quieter session issuance-wise has seen spread moves mixed across the curve.

Currently the 2y swap spread is +1.5bps at 8.5bps, 5y is +0.125bps at -20.875bps, 10y is stable around -27.75bps and the 30y is little changed around -68.5bps.

BoA: Data to increase rates peak, drive flattening

Strategists at BofA said today that the unexpected strength of recent US data, as exemplified recently by retail sales data and, yesterday, by very strong PMIs, means they expect the UST curve to flatten further before rates finally peak.

BofA said that “US rates have moved higher with economic re-acceleration and inflation risks, especially at shorter tenors. Rate ranges have broken to the upside as Fed terminal expectations have been re-set. The longer the Fed continues hiking, the longer the shorts will likely perform, the more inverted the curve can go, and the longer the front-end vol can remain elevated.”

It said it now sees 2y and 5y rates exceeding its previous forecasts to the upside, while they “10Y and 30Y forecasts unchanged. Strong data supported our view for the market to price stickier inflation near term, allowing for terminal to be re-set higher and near-term cuts to get priced out. We believe the shorts are better placed in the front-end where the Fed's reaction function has room to re-price, while a supportive demand picture makes us better buyers on dips.”

Looking longer term, BofA said that “We still believe rates will be falling later with an eventual US economic slowdown and conviction in peak Fed funds. However, the front-end may still be slower to rally due to sticky inflation and a higher Fed terminal rate.”

New issues:

• OKB is close to pricing a $1bn, 5y bond at SOFR swaps +36bps via BofA, Deutsche, JPM and RBC.

• Mizuho yesterday priced 3-part bond offering consisting of $1bn 6.25NC5.25, $700m 8.25NC7.25 and $900m 11.25NC10.25 benchmark via MIZ and BofA. Priced at +150bps, +165bps, +180bps.