USD Swaps: USTs bull flatten as Bullard soothes but minutes agitate

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USTs bull flatten as Bullard soothes but minutes agitate

St. Louis Fed President Bullard got the ball rolling early in today’s price action by surprisingly rubbing a bit against the grain of the recent Fed messaging.  Indeed, Bullard implied that the Fed’s work may almost be done as his projection is for the fed funds rate to reach 5.375% - or a mere 75bps more in hikes.  And coming from an uber-hawk like Bullard, markets liked what the heard with both USTs and the major domestic equity indices embarking on a rally in the early trade today.

However, today’s main event was really the release of the FOMC minutes from the January 31/February 1 meeting which market participants didn’t really glean any new major insight when it came to rate hikes after sifting through the tea leaves.  Rather the minutes confirmed the Fed’s resolve to bringing inflation down to 2% while also stating that “almost all” officials favored a 25bps rate hike while “a few” could have backed a 50bps hike instead. Reflecting on the minutes, strategists at BofA have the following takeaways:

”…In our view, there is little, if any, new information in the minutes to the January-February Federal Open Market Committee (FOMC) meeting. Much of the details were known at the time of the meeting given the decision to slow the pace of rate hikes to 25bp in the policy action and Chair Powell's explanation of the outlook, risks to the outlook, and risk-management considerations about the pace of rate hikes going forward. The Fed was not debating about whether incoming data suggested that the economy was re-accelerating. Instead, FOMC participants and Fed staff saw growth in economic activity slowing further in 2023 as the lagged effects of policy rate tightening materialized. We will have to wait until the March FOMC meeting to see how the committee views the signal from the recent data flow.

 

“…Following the February FOMC minutes, we retain our outlook for monetary policy, which includes three additional 25bp rate hikes for a projected target terminal range for the federal funds rate of 5.25-5.5%. Labor market momentum and recent inflation data suggest that monetary policy is not sufficiently restrictive to moderate demand and put inflation on a path to 2% with sufficient confidence.”

Post- minutes, equities have  pushed off their earlier highs to close out mixed (Dow -0.26%, S&P -0.16%, Nasdaq +0.13%) while Treasuries have also come of their best levels but still remain in the black heading into the close.  The benchmark 10y note yield is last 3.5bps lower at 3.918% after hitting a low water mark of 3.884% just before the minutes hit the tape.  On the curve, longer tenors have outperformed most of the day with the 2s10s spread 3bps narrower (roll adjusted) at -77.5bps while the 5s30s spread is 1.9bps narrower at -22.4bps. 

Further in, red and green SOFR futures are unch to 6 ticks firmer in the outperforming Dec24 contracts.  Meanwhile, swap spreads are lightly bid across the board after a handful of IG deals priced today, headlined by $2.5bn deal from NextEra Energy. 

Earlier, today’s $43bn 5y note auction tails 0.3bps versus the 1pm bid side, drawing a stop-out rate of 4.109% and a 2.48x bid-to-cover.  Both direct and indirect bidders were a bit less aggressive than they were at the January auction that saw the lowest dealer take-down in history with allocation today of 19% and 69.9% respectively.  This left dealers with 11.02% of the issue today versus 8.8% last month. 

Currently, SOFR swaps – 2s 10bps (+0.25bps)*, 3s -6.25bps (+0.5bps), 5s -20.375bps (+0.625bps), 7s -30.25bps (+0.25bps), 10s -27.375bps (+0.375bps), 20s -58.875bps (+0.75bps), 30s -67.75bps (+0.875bps).

* adjusted for the 3bps give.

New issues

• NextEra Energy Capital priced a $2.5bn 2y deal via WFS, BofA and JPM.  Baa1/BBB+/A-.  Priced at +120bps.

   

• Prudential Financial priced a $500m 30NC10 deal via GS, HSBC, JPM and MS.  Baa1/BBB+/BBB.  Priced at 6.75%.

   

• Eastman Chemical priced a $500m 10y green deal via BofA, Citi, JPM and MIZ.  Baa2/BBB/BBB-.  Priced at +185bps.

   

• OKB priced on a $1bn 5y deal via BofA, DB, JPM and RBC.  Aa1/AA+.  Priced at MS + 39bps area.