USD Swaps: Flatter curve stabilizing in bearish start to week

Flatter curve stabilizing in bearish start to week

Friday’s stronger-than-expected PCE (data that the Fed rates highly as a key inflation warning sign) was immediately identified by traders and strategists as a potential source of USD fixed income curve flattening. And so it has come to pass.

As market participants scramble to review their FOMC rate hike forecasts, so the front-end of the curve is similarly adjusting. The 2y benchmark UST yield has now sold off 16bps from Friday morning to 4.835%, while 10y is +9bps at 3.965% and 30y is +8.5bps at 3.955%. So far today the 2y, 10y and 30y yields are up by 2bps, 3bps and 3.75bps respectively, illustrating that the sharpest shock waves from the front end following PCE are still rippling down the slower-to-react longer reaches of the curve.

This front-end-driven repricing illustrates that a sceptical market was forced to crack following that PCE number, and accept that for all of January’s dovish Fed messaging, expected rate peaks have to be revised higher.   

That said, after its vigorous re-pricing on Friday USTs are being outstripped in their bearishness by Bunds (+4bps in 10y) and gilts (5bps). In the case of the former hawkish ECB comment are pushing the anticipated rate ceiling upwards in Europe as it is in the UK, while in gilts the soggy start has been aided by big picture concerns related to gilt supply and government finances.

So a bearish start to the week across the board but with March looming and the first anniversary of the inflation-fuelling Ukraine invasion just past, who knows whether this new hawkish trend will still hold sway once April starts skipping into view.

At the time of writing the 2y ASW is +0.25bpas at 10bps, 5y is -0.125bps at -19.125bps, 10y is unchanged at -27bps and 30y is -0.125bps at -67.75bps.

NatWest: 50bps Fed hike in March; 5.75% peak

A combination of recent bullish economic data (payrolls, retail sales, CPI, PCE) and hawkish messaging from some wings of the FOMC are combining to take an increasing toll on dovish market sentiment, something that is increasingly seeping through to rate strategists as well as trading desks.

Today NatWest revised its rate forecast to reflect the recent resilience of US economic data, focusing on two standout numbers from last week. It said that “Core PCE price deflator rounded up to 0.6% (0.571% unrounded) in January. Powell’s "core services ex shelter" also up by 0.6% — the biggest monthly gain since June. We now expect a +50bp rate hike in March, +25bps in May and +25bps in June. Terminal rate now 5.75%—up from our earlier 5.25% estimate.” 

Looking to this week’s highlights, among “a slew of mostly second-tier data, the ISM surveys are the main reports... The factory sector is expected to show the manufacturing activity remained in contractionary territory in February, while the services sector gauge is expected to come off a bit relative to January’s level but still signal expansion. Auto sales should give us an important early look at consumption in February.”  

And looking at what it expects from the UST market it says “we continue to view the backup in US Treasury yields as a long-term buying opportunity, particularly in the front end, despite the strength of January data. In addition, this week we look at the recent widening in front end swap spreads and caution against fading that prematurely, while 20yr spreads look fair.”  

New issues:  

• Air Lease Corp has mandated Bank ABC and Dubai Islamic Bank to structure a Senior 5y 144A Sukuk Bond following investor meetings in the UAE, Qatar and Saudi Arabia.

   

• Teva Pharmaceutical plans a four part EUR/USD bond issue following roadshows today and tomorrow.  The deal will consist of a $500m, 6.5y tranche, a $500m, 8.5y tranche and two €500m tranches of matching maturities. via Citi, Goldman, Mizuho, M UFG and PNC. Via Citi, Goldman, Mizuho, MUFG and PNC.