USD Swaps: 10y tests 4% as belly sinks further; Front/reds eyed

Line chart 25 Mar 2021
The 10y yield closed in at 4% after higher ISM prices paid. Swap spreads are off the morning wides while IG supply pace slows. JPM eyes fronts/reds.

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  • 10y tests 4% as belly sinks further; Front/reds eyed

  • New issues


    10y tests 4% as belly sinks further; Front/reds eyed

    Treasuries have sold off further in a continued belly-led move, after ISM prices paid rose more than expected (51.3 vs. 46.5) while ISM manufacturing came slightly under (47.7 vs. 48).  The 10y note yield is testing 4% (7.2bps higher in yield) while 2s10s is last 2.2bp wider at -88bps and 5s30s 1.3bps flatter at -28bps. Equities are mixed (DJIA +0.14%, S&P -0.19% and Nasdaq -0.26%).  In Fed-speak this morning, non-voter Atlanta Fed President Bostic saw Fed funds staying at 5-5.25% and “leaving it there until well into 2024.”


    Elsewhere, swap spreads have been narrowing in from the morning wides and the swap spread curve is steepening against the underlying flattening of the UST curve amid below average volumes thus far. On the issuance supply side, after closing out a record $150.9bn for the month of February, IG new issuance for today is seeing a slightly lower pace from the first two days of the week, led by a Sumi Trust 3-part (3y fixed, 3y FRN and 5y green).


    Forecasts for IG new issuance (ex-SSA) March expect around $140bn for the month, sources say. In comparison, the previous record in February of $113bn achieved in 2021 was followed by an even busier $196bn March, but surveys expect a more even distribution for 2023 since February already saw above expected volumes, sources suggest.   


    At the front end of the curve, although front end yields have in fact repriced significantly, analysts at JP Morgan believe there is more to go. “The Fronts/Reds curve has bounced off of its most inverted recent levels, but it remains highly inverted at nearly -75bp and the recent steepening has merely undone the effects of the late December/January rally,” the bank highlights.


    Indeed, JP Morgan believes this steep inversion “remains at odds with the Fed's messaging which continue to sound caution around expectations of premature easing” and therefore the bank sees Fronts/Reds dis-inversion “as a key source of carry and slide on the curve, as the roll-up towards spot is favorable for shorts in the Reds”:


      ”One way to position for such slide, while also maximizing the ratio of slide to overall risk, is by selling the belly of a U3/M4/H5 SOFR futures butterfly (33:77 weights on the wings)…this weighted butterfly spread has been fairly mean-reverting - indeed, the 6M standard deviation of rolling 3M changes in this spread has been about 8.4bp. But this butterfly also has very attractive slide, to the tune of 36bp over 3 months, which is over 4 times the 1-sigma move in the spread.”


    Thus, given attractive slide relative to the risk, JP Morgan recommends selling the belly of the 33:77 weighted U3/M4/H5 3M SOFR futures butterfly.


    Currently, SOFR swaps 2s 9.875bps (-0.25bps), 3s -6.25bps (-0.25bps), 5s -19bps (-0.5bps), 7s -30.125bps (-0.75bps), 10s -27bps (unch), 20s -60.75bps (+0.75bps), 30s -67bps (+0.875bps).



    New issues


    • Sumi Trust plans a $TBA 3-part (3y fixed, 3y FRN and 5y green). Leads GS, JPM, Citi and Daiwa on the 3y and BNPP, BofA, CACIB, GS and Daiwa on 5y. A1/A. Price talk +135bps, SOFR equivalent and +155bps area.   


    • EBRD is preparing a USD 5y Global at around swaps +35bps. Leads are Daiwa, GS, JPM and TorDom. 


    • L-Bank plans a USD 3y at around swaps +28bps via BMO, DB, JPM and RBC.


    • Five Corners is working on a $TBA 2-part pre-capitalized trust securities (10y and 30y). Leads BofA, Citi, CS, DB and Mizuho. A3/A. Price talk +195bps and +220bps area.


    • Eversource plans a $750m (no grow) 5y. Leads BofA, JPM, Mizuho, MS, USB and WFS. Baa1/BBB+/BBB+. Price talk +150bps area.


    • Simon Property is working on a $TBA 2-part (10y and 30y). Leads Citi, JPM, Mizuho and Scotia. A3/A-. Price talk +185bps and +215bps area.


    • Stanley Black & Decker plans a $TBA 2-part (3y NC1 fixed and 5y). Leads BofA, Citi, JPM and WFC. Baa2/A/BBB+. Price talk +155bps and +155bps.


    • Edison International is working on a $TBA 30y NC5. Leads BofA, CS, RBCCM and TSI. Baa3/BB+/BB. Price talk 8.5%.


    • KeySpan Gas East plans a $TBA 10y. Leads GS, JPM, MS and RBCCM. Baa1/BBB+/A-. Price talk +220bps area.


    • Morocco is working on a $TBA 2-part (5y and 10.5y). Leads BNPP, DB, Citi, JPM. Ba1/BB+. Price talk +210bps and +275bps area.


    • TEVA Pharmaceuticals plans a $600m 6.5y and a $500m 8.5y sustainability bonds. Leads Citi, GS, Mizuho, MUFJ and PNC. Price talk 7.875% and 8.125%.