USD Swaps: UST bull-flattener lives on; PCE deflator next hurdle for the market

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UST bull-flattener lives on; PCE deflator next hurdle for the market

Yesterday’s FOMC minutes made the case for ongoing rate increase to tame the inflation beast but today’s data suggested the U.S. economy is shifting into lower gear – albeit with a still strong labor market.  To be sure, the second look at GDP unexpectedly contracted to 2.7% QoQ (versus +2.9% Bloomberg consensus, +2.9% prior).  However, the labor data remains hot as first-time jobless claims fell down to 192k (versus +200k Bloomberg consensus, +195k revised prior).

Post-data, after brief spike in yields that saw them hit new YTD highs this morning, Treasuries resumed the bull flattening that started taking hold yesterday as more market participants jumped on the ‘slowdown’ narrative.  Hence, at today’s end of trade, the benchmark 10y note yield is last another 3.5bps lower at 3.881% after a brief flirtation with 3.98% this morning. On the curve, the 2s10s spread is another 3bps narrower at -1.25bps while the 5s30s spread is another 1bps narrower (5y roll adjusted) at -22.6bps. 

Further in, red and green SOFR futures are poised to close out anywhere from 2.5 ticks softer in the Mar24 contracts to 6 ticks firmer in the Mar25 contracts.  Meanwhile, swap spreads are ending the session tighter across the board after another decent flurry of IG issuance this session (see below).

Earlier, today’s $35bn 7y note auction had a bit of a rough landing as it tailed roughly 1.5bps to draw a stop-out yield of 4.602% and a ho-hum 2.49x bid-to-cover.  Indirect bidders were much less aggressive with their 65.5% take-down (versus 77.1% last month) while directs stepped up a bit with their 20.8% take (versus 16.8% last month).  This all left dealers with a 13.7% allocation which was up from their record low 6.1% last month. 

Looking ahead, yesterday’s FOMC minutes once again emphasized that the path forward will be driven by the data. And, heading into the release of the January PCE deflator tomorrow morning, strategist at NatWest caution that “the risks tilt to the upside for the Fed’s preferred inflation measure.”  For January, the bank expect “the core PCE deflator to be up 0.5%, above the 0.4% rise in the core CPI. In addition, revisions to Q4 may be revised up too.”   This forecast falls in line with Bloomberg consensus of +0.5% MoM/5% YoY.

That said, NatWest still thinks that “the odds are decent that the next monthly data cycle will indicate that growth doesn’t have nearly the momentum as this month's headlines might suggest (we still forecast a mild recession in H2), but there is obviously a risk that the strength in the data won't fully subside as early as next month.” 

If February payrolls post an even modest gain, retail sales growth pause and the core CPI meet expectations, NatWest suggests that “it seems increasingly likely that Fed officials opt to push up their terminal rate forecast for 2023 (from December’s peak of 5.25% estimate to 5.50%) at the March meeting.”  Also, the bank suspects that “officials (will) shift the emphasis from ‘how high’ to ‘how long’ officials (will) leave rates at the terminal rate.”

Currently, SOFR swaps – 2s 8.75bps (-1bps), 3s -7bps (-0.875bpos), 5s -19.5bps (-1bps)*, 7s -31.25bps (-0.875bps), 10s -28.125bps (-0.75bps), 20s -59.5bps (-0.375bps), 30s -68bps (-0.25bps).

* adjusted for the 1.8bps give.

New issues

• Eli Lily launched a 4-part $750M 3NC1, $1bn 10y, $1.25bn 30y and $1bn 40y benchmark via CS, GS, JPM, and MS.  A2/A+.  Launched at +65bps, +85bps, +100bps, +115bps.

   

• Raytheon Technologies launched a $500m 3y, $1.25bn 10y and $1.25bn 30y benchmark via Citi, DB, GS and MS.  Baa1/A-.  Launched at +60bps, +130bps, +150bps.

   

• Assurant priced a $175m 3y deal.  Baa2/BBB.  Priced at +170bps.

   

• Kellogg priced a $400m deal via BofA, Barclays and Citi.  Baa2/BBB. Priced at +140bps.

   

• Aon priced a $750m 10y benchmark via BofA, HSBC and MS.  Baa2/A-/BBB+.  Priced at +147bps.

   

• Trimble priced an $800m 10y benchmark via WFS and BofA.  Baa3/BBB-.  Priced at +225bps.

   

• BHP Billiton Finance USA Ltd. priced a $1bn 3y, $1bn 5y and $750m 10y benchmark via Barclays, BofA, BNPP, MUFG and Santan.  A2/A-.  Priced at +55bps, +75bps, +105bps.

   

• UPS priced a $900m 10y and $1.1bn 30y benchmark via Barclays, Citi, MS, SocGen and WFC.  A2/A.  Priced at +100bps, +120bps.