USD Swaps: $19bn IG supply; Bull steepener

$19bn IG supply; Belly-led rally   

Treasuries have seen a meandering trade for much of the day, with yields settling 1 to 4bps lower on the day, led by the front and belly of the curve. The 10y note yield is last 3.928% or 2bps lower on the day while 2s10s is 1.7bps steeper at -86bps and 5s30s has jumped 6.5bps steeper at -23.7bps. Equities gained but end well off the morning highs (DJIA +0.22%, S&P +0.28% and Nasdaq +0.63%) after much higher pending home sales (8.1% versus 1% forecast) offset lower Dallas manufacturing (-13.5 versus -9) and mixed durable goods (-4.5% headline/+0.7% ex-transport versus -4%/+0.1% expected).  

Meanwhile, week over week, the probability of a 50bps raise in March has increased to 25% from 18% a week earlier (but off the 27% priced in on Friday) – thus a non-trivial amount of a bigger hike compared to a month ago, sources highlight.

On the IG supply front, sixteen issuers crowded in today’s window and priced a total of $19bn in new supply – the largest deals coming from NatWest ($2bn 2-part) and John Deere ($2bn 4-part). The majority of the issuance was likely not swapped as FIG issuance (i.e. swap candidates) only accounted for $3bn out of the $19bn (Yankee FIGs Lloyds $1bn 6y NC5 and NatWest’s $2bn total in 4y NC3 and 11y NC10). Overall, the swap spread curve flattened amid mixed volumes.

Turning to the dynamics of the long end of the spread curve, analysts at JP Morgan favor staying with their widening view on long end swap spreads. First, the bank finds that swap spreads in the 30-year sector are “especially narrow relative to fair value.” JP Morgan believes that one factor that has likely pressured spreads narrower in this sector “is the strength in economic data which has pushed hiking expectations higher and thus helped pressure the dollar stronger.”

Using the bank’s fair value model for long end swap spreads, JP Morgan estimates that the 4-point increase in the trade-weighted USD since early February “has likely helped pressure spreads narrower by 6bp, which is almost all the narrowing seen in 30-year spreads.” With this analysis, the bank remains biased towards wider 30-year spreads, but it also recognizes the risk posed by the dollar.

“One way to mitigate this risk is to initiate 30-year swap spread wideners paired with a short in Yen futures” and the bank uses the correlation between the trade-weighted dollar and USD/JPY to construct a simpler hedge – with the JPY/USD “reasonably well correlated to the trade weighted dollar, with a beta of about -0.9,” the bank calculates, and thus it recommends a long 30y spread widener hedged with short Yen futures. 

Currently, SOFR swaps 2s 11bps (+1.125bps), 3s -5.5bps (-0.375bps), 5s -19.25bps (-0.25bps), 7s -29.5bps (unch), 10s -27.25bps (-0.25bps), 20s -60.375bps (+0.25bps), 30s -68bps (-0.25bps).

New issues

For a complete review of issuance over the past week, please see USD New Issues.

• Bank of England plans a $TBA 3y. Leads BofA, DB, RBCCM and TD. Aa3/AA/AA-.  Price talk +16bps. Expected to price tomorrow.   

   

• 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.

   

• Southern California Edison launched a $1.2bn 2-part FMB ($750m 5y and $450m 30y). Leads BNPP, JPM, SMBC and WFS.  +115bps and +180bps.

   

• PPL Electric Utilities priced a $1.35bn 2-part ($600m 10y and $750m 30y). Leads Barclays, PNC, Scotia and USB. A1/A+. +120bps and +145bps.    

   

• NatWest priced a $2bn 2-part ($1bn 4y NC3 fixed to fixed and a $1bn 11y NC10 fixed to fixed). Leads BofA, GS, JPM, NatWest, UBS and WFS. A3/BBB/A. +135bps and +210bps.

   

• John Deere priced a $2bn 4-part ($500m 2y, $550m 3y, $300m 3y FRN and $650m 5y). Leads Barclays, CACIB, Citi and MUFG. A2/A/A+. +40bps, +55bps, SOFR +57bps and +75bps.

   

• DTE Electric priced a $1.2bn 2-part ($600m 10y and $600m 30y). Leads BofA, Scotia, TD Sec and TSI. Aa3/A/A+. +130bps and +150bps.

   

• Lloyds priced a $1.25bn 6y NC5 fixed to fixed. Leads Lloyds, Mizuho, MS. TD and WFC. A3/BBB+/A. +170bps.

   

• Colgate Palmolive priced a $1.5bn 3-part ($500m 3y, $500m 5y and $500m 10y). Leads BNPP, GS, MS, WFC. Aa3/AA-. +33bps, +45bps, +70bps.

   

• Arrow Electronics priced a $500m 3y NC1. Leads ING, JPM, Mizuho and PNC. Baa3/BBB-/BBB-. +163bps.

   

• FiServ priced a $1.8bn 2-part ($900m 5y and $900m 10y). Leads BofA, JPM, PNC and USB. +130bps and +170bps.

   

• Humana launched a $1.25bn 2-part ($500m 3y NC1 and $750m 30y). Leads Barclays, Citi, MS, USB and WFC. Baa3/BBB+/BBB. +120bps and +180bps.  

   

• American Electric Power priced a $850m 10y. Leads Barclays, Key, MUFG, TD and USB. Baa2/BBB+/BBB. +175bps.

   

• Air Products priced a $600m 10y. Leads Citi, JPM, Mizuho and SMBC. A2/A. +90bps.

   

• Union Electric priced a $500m 30y FMB. Leads Key, BofA, RBCCM, TD and USB. A2/A. +155bps.

   

• Vulcan Materials priced a $550m 3y NC1 fixed. Leads BofA and TSI. Baa2/BBB+/BBB.  +130bps.

   

• Arthur J. Gallagher priced a $950m 2-part ($350m 10y and $600m 30y). Leads BofA and Citi. +160bps and +190bps.  

   

• Williams Co. priced a $1.5bn 2-part ($750m 3y and $750m 10y). Leads DB, JPM, Mizuho and MS. Baa2/BBB/BBB. +93bps and +175bps.