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Collins swoops in with extended talons; Debt limit & T-Bill update
Fed officials were quick to chime in today – to not appear behind the curve – on the heels of this morning’s outsized jump in unit labor cost (3.2% versus +1.6% Bloomberg consensus). Indeed, Boston Fed President Collins swooped with extended talons, stating that she believes that the Fed “will need to do some additional rate increases” and that “it will be important to hold there for some time because it take a while for the effects of tighter financial conditions to work through the economy.”
And not surprisingly, Treasury yields remain near the highs of the session after today’s data continued to confirm that the market may need to catch up with the Fed. The benchmark 10y note yield is last 8.3bps higher at 4.077% with the next big line in the sand seen at 4.25% - essentially the Oct/Nov highs. On the curve, longer tenors remain the weakest link with the 5s30s spread 0.5bps wider at -29.8bps.
Further in, red and green SOFR future are up to 6 ticks weaker in the underperforming Sept/Dec25 contracts. Meanwhile, swaps spreads are mixed with the spread curve steepening along with USTs mixed amid below-average activity overall. In the backdrop, IG issuance continues to churn amid a relatively moribund risk backdrop this session (Dow +0.29%, S&P -0.15%, Nasdaq -0.64%).
Elsewhere, looking at the current state of U.S. fiscal policy, strategist at JP Morgan followed the recent CBO revisions in their budget forecasts for FY23 and FY24 and now expect this year’s deficit to total $1,410bn, $360bn larger than their previous forecast. With a cumulative deficit of $460bn recorded in the first four months of FY23, the bank notes that “this revision implies that the fiscal deficit for the remainder of the fiscal year will be $950bn, well above the $590bn implied by our previous forecasts.”
Generally, a wider budget deficit forecast has implications for the debt ceiling debate and JP Morgan expects that “Treasury will run out of available resources by the middle of August, compared with our late-summer/early-fall prior projection.” Overall, the bank finds that these revisions also have two implications for Treasury supply:
- ”… First, assuming new debt ceiling legislation is passed at some point this summer, T-bill net issuance could turn positive earlier in the year than we had previously forecast.
“…Second, the larger deficit forecasts also raise the probability that Treasury will increase nominal coupon sizes this year, versus our forecast that it will keep coupon auction sizes unchanged through 2023.”
Though this wider budget deficit forecast implies an earlier drop-dead date for a potential technical default, JP Morgan believes that “it’s too early in the debt limit process to position for an exact drop-dead date, given elevated uncertainty, particularly around April tax receipts.”
Having said that, JP Morgan finds that “T-bills maturing during the month of August appear relatively cheap versus surrounding sectors” and that “recently-issued bills are trading cheap to neighboring maturities that were issued previously, suggesting that investors are starting to require a concession to purchase T-bills in the auction process.”
Currently, SOFR swaps – 2s 9.25bps (-1.375bps), 3s -6.5bps (-1bps), 5s -18.75bps (unch), 7s -29.875bps (unch), 10s -26.25bps (+0.25bps), 20s -61bps (+0.25bps), 30s -66.875bps (+0.375bps).
- Black Hills is working on a $350m 5y deal via BofA and JPM. Baa2/BBB+/BBB+. Price talk: +190bps area.
- NRG is working on a $740m 10y deal via Citi, GS, MS, MUFG and BofA. Baa3/BBB-/BBB-. Price talk: +325bps area.
- Northwest Natural Gas is working on a $100m 10y FMB deal via RBC and USB. A2/AA-. Price talk: +175bps area.
- HSBC plans USD TLAC 6y NC5, 11y NC10 and 21y NC20 bonds at around Treasuries +210, 245 and 245bps. Self-led.
- Norinchukin Bank is preparing a USD 5y Green bond at around Treasuries +140bps. Leads are Citi and JPM (B&D).
- EBRD is preparing a USD 5y Global at swaps +31bps. Leads are Daiwa, GS, JPM and TorDom.
- L-Bank plans a $2bn 3y at swaps +26bps via BMO, DB, JPM (B&D) and RBC.