USD Swaps: ISM prices paid knocks out USTs; Rate pendulum swung too far?

Throwing the towel
USTs never recovered from this morning’s ISM prices paid data. But SocGen believes the rate pendulum has swung too far.

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  • ISM prices paid knocks out USTs; Rate pendulum swung too far?

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    ISM prices paid knocks out USTs; Rate pendulum swung too far?

    This morning’s ISM prices paid data sent Treasuries on another downward spiral and the market has simply not been able to get off the ropes as the closing bell rings on today’s trade.  The benchmark 10y note yield is closing out near the session highs, up another 8bps at the psychologically significant 4% level (…which some now see as a buying opportunity – see below) while the 5s30s spread is 3.3bps narrower at -30.2bps. 


    Meanwhile, swap spreads remained mixed with the spread curve staying steeper against the underlying flattening in the UST curve amid below-average swap volumes throughout the session.  In the backdrop, investors were met with another decent slate of new IG issuance despite today’s modestly sullied risk tone (Dow -0.13%, S&P -0.63%, Nasdaq -0.68%).  Notably, the IG issuance tally already totaled over $30bn heading into today’s session with big multi-tranche deals from the likes of Sumi Trust and Simon Property adding nicely to this week’s heavy deal flow.


    Elsewhere, at the front-end, red and green SOFR futures are off anywhere from 11 to 13 ticks in the wake of today’s data along with early (post-data) comments from Minneapolis Fed President Kashkari stating that he’s “open-minded, at this point, about whether it’s 25 or 50s basis points” for the Fed’s next rate hike.  Meanwhile, the Fed fund futures are now pricing in a peak rate at 5.50%.  But with almost every market participant now trading on inflation, strategists at Barclays caution not to read too much into today’s price data:


      ”… The input cost index came in at 51.3, 6.8pts higher than its January reading, and a significant change following a series of sub-50 readings from October through January. This reinforces evidence that January's firming in consumer goods prices (in CPI, and especially PCE prices) was not idiosyncratic, but driven by firming cost fundamentals. Although the overall input cost index seemingly emerged from contractionary territory in February, cost developments were mixed across industries, with eight of the eighteen industries reporting increased input costs last month versus four in January. According to the ISM, ‘a prices index of 52.9 percent, over time, is generally consistent with an increase in the for intermediate materials.’ This implies that input costs are leveling, not re-accelerating, which is consistent with what we had inferred from the January data on goods prices; nonetheless, this is more bad news for those who had expected declining goods prices to continue to push broader disinflationary pressures in the coming months.”


    More broadly, the market is now pricing in nearly four more 25bp rate hikes this year while just a few weeks back there were just two hikes priced for 1H and cuts beginning as early as June.  Thus, in the view of strategists at SocGen “the market is now efficiently priced for the Fed’s ‘higher for longer’ scenario, which makes sense in  the context of a tight labour market.”


    But with little in the way of new ‘first tier’ data to justify the dramatic re-pricing of market expectations for policy, SocGen believes that “the pendulum seems to have swung too far.”  Indeed, while the  strong jobs report and CPI print for the month of January (in line with consensus forecasts) were  the primary catalysts for the recent re-pricing, the bank believes that “we need to see more evidence to warrant  another 100bp of rate hikes in the coming months.”  And in SocGen’s view “monetary policy is a blunt tool and the Fed’s singular focus on inflation will eventually lead to demand destruction.”


    In this context, SocGen believes that  “risks are asymmetrically skewed toward lower yields (though timing the inflection point will remain tricky),” and it favors initiating 10y USTs long near current levels:


      ”…. The more the Fed hikes, the higher the probability of a hard landing. This explains why the market is still expecting a policy pivot – although the timing has been pushed out to later this  year. In this context we believe risks are asymmetrically skewed toward lower yields, though timing the inflection point will remain tricky. We would view the 10yT yield returning to near 4% as an opportunity to leg into longs if you can weather a potential overshoot over the near term.


    Currently, SOFR swaps – 2s 10.125bps (unch), 3s -5.625bps (-0.25bps), 5s -18.75bps (-0.25bps), 7s -29.875bps (-0.625bps), 10s -26.625bps (+0.25bps), 20s -61.25bps (+0.25bps), 30s -67.25bps (+0.625bps).



    New issues

    • 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.


    • Sumi Trust launched a 3-part $1bn 3y fixed, $500m 3y FRN and $500m 5y green. Leads GS, JPM, Citi and Daiwa on the 3y and BNPP, BofA, CACIB, GS and Daiwa on 5y. A1/A. Launched at +110bps,  SOFR + 112bps, +128bps.   


    • Stanley Black & Decker launched a 2-part $350m 3y NC1 fixed and $400m 5y. Leads BofA, Citi, JPM and WFC. Baa2/A/BBB+. Launched at +165bps and 175bps.


    • Morocco launched a 2-part $1.25bn 5y and $1.25bn 10.5y. Leads BNPP, DB, Citi, JPM. Ba1/BB+. Launched at +195bps and +260bps.


    • Five Corners priced a 2-part pre-capitalized trust securities ($1.5bn 10y and $800m 30y). Leads BofA, Citi, CS, DB and Mizuho. A3/A. Price d at +180bps and +205bps.


    • KeySpan Gas East priced a $500m 10y. Leads GS, JPM, MS and RBCCM. Baa1/BBB+/A-. Priced at +200bps.


    • Simon Property priced a 2-part $650m 10y and $650m 30y. Leads Citi, JPM, Mizuho and Scotia. A3/A-. Priced at +165bps and +195bps..


    • Edison International priced a $500m 30y NC5. Leads BofA, CS, RBCCM and TSI. Baa3/BB+/BB. Priced at 8.125%.


    • Eversource priced a $750m 5y. Leads BofA, JPM, Mizuho, MS, USB and WFS. Baa1/BBB+/BBB+. Priced at +123bps.