USD Swaps: Flirty four-play teases ahead of data

Floating number 4 four percent 2 Mar 2023
The 4% level has a hold over the 10y UST yield which having tried to soar past that nice round number, now hovers teasingly above it. BNPP eyes ISM.

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  • Flirty four play teased ahead of data

  • BNPP: ISM data to shed light on spike

  • New issues:


    Flirty four-play teases ahead of data

    The sophisticated and multi-trillion dollar global fixed income market’s fixation with nice, round numbers revealed itself again today as the benchmark 10y UST flirted with the 4% mark like an asteroid circling a very densely-massed planet.


    The 4% mark was, until last night, last seen in November so is a reasonably long-term resistance point, but after seemingly having smashed through it yesterday, hitting 4.08%, the 10y yield has now come back to hover on and around that lovely round number.


    Currently it is at 4.015%, -4bps from last night’s close, during a session marked by bull-flattening (2s/10s USTs is -2.5bps, 10s/30s is -0.5bps) amid a fixed income trading session that seems keen to confirm a sense that the February bear-market is on hold, subject to review.


    Right now the 10y yield is exactly 50bps above the 3.51% level that it found itself at on February 1, and traders this week have been telling TotalDerivatives that core EGB, gilt and UST markets are now trading short after a February comeback for inflation angst, and from now on dip-buying, rather than kneejerk dumping, is likely to signal the start of a transition out of the bear market, certainly in gilts and USTs, and towards something more bullish, inflation permitting.


    Direction-wise today, the most likely homegrown market mover is the upcoming ISM data (see below) as well as Fed commentary from regional Fed Presidents Logan and Bostic, as well as Fed Governor Bowman. While none of the speeches look set to have a sharp focus on rates policy, Bowman and Logan are both FOMC voters and need to be kept an eye on.


    In swap spreads, the expected quiet Friday issuance program has allowed the ASW curve to reflect the move in the UST curve, with the 2y ASW +0.25bps at 10.5bps, 5y is -0.125bps at -18.5bps, 10y is -0.375bps at -26.75bps and the 30y is -0.75bps at -67.25bps.


    BNPP: ISM data to shed light on spike

    On a day lacking standout scheduled news events, strategists at BNPP focused today on ISM Services data for February. The data plunged about 5 points to 49 in December before rebounding to 55.2 in January, and BNPP says today’s number should give some kind of clue as to which of those headlines is the more useful guide to current sectgor strength.


    It says that “the January blockbuster data fueled the re-acceleration rhetoric. February data, including the manufacturing ISM showing contraction in employment and auto sales reversing part of the prior gain, throw some cold water on such narrative. The February services ISM (10:00 EST) will help to shed the light on whether the January spike in the index was a payback to the December fall into contraction or a true pick-up in activity in the largest economic sector.”


    BNPP believes that ”’services activity may soften after exaggerated January bounce.’ We estimate a 1.2pt drop to 54.0, retracing part of the surprise six-point bounce in January. That would be consistent with rate hikes biting, albeit gradually. Abnormally warm weather across much of the country, scant snow in the northeast and glimmers of a housing market rebound as rates fell likely exaggerated gains in new orders and activity in January, factoring into our expectation of a drop this month.”


    Looking at the employment indications of today’s number, BNPP said that “the January ISM services survey, released last month, hinted at labor hoarding in an extremely tight market. The services employment component rose to the 50 breakeven level from 49.4. This suggests that even if companies are freezing new hiring, they may not be ready for layoffs. Thursday's data on jobless claims persistently coming in below expectations and unit labor costs rising sharply in the revised Q4 reading are pointing in the same direction. Elevated wage pressures will not allow for deceleration in core service prices, the key determinant of the near-term policy path.”


    New issues:

    • HSBC last night priced a $7bn 3-part TLAC ($2bn 6y NC5, $2.25bn 11y NC10 and $2.75bn 21y NC20). Self-led. A3/A-/ A+. +185bps, +220bps and +210bps.