USD Swaps: USTs brush off hawks, for now; Spreads in

Jay Powell testifying
A new week begins with minds fixed firmly on the Fed, and data. Despite in-character recent comments from ECB and Fed hawks, USTs are firm.

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  • USTs brush off hawks, for now

  • Deutsche Bank: Sticking with swap spread steepeners

  • New issues


    USTs brush off hawks, for now

    A new week begins with minds fixed firmly on the Fed, and then on data. Chair Powell makes his semi-annual Monetary Policy reports to testimony to Congress on Tuesday and Wednesday, before the week ends with February non-farm payrolls (consensus is 215K versus 517K).


    An amalgam of strategists’ forecasts suggests Powell will avoid being freshly hawkish in his Washington meetings, but then there seems to be a growing school of thought that NFP data, which will be swiftly followed by the Fed blackout period, may seal a 50bps hike by the Fed on Mar 22, instead of the previously-favored 25bps. And if NFP doesn’t get to the doves this week, CPI has a good chance of doing so next week.


    Nonetheless, USTs have begun the week as they finished on Friday, in bullish mood, defying the forces that today saw 3m USD LIBOR come out above 5% for the first time in fifteen fleeting years. Having hit 4.09% as recently as Thursday afternoon, the 10y UST yield is now down at 3.90%, which is 5bps down from Friday’s close.


    The move is USTs is similar to the current 5bps drop in Bund yields, while 10y gilts are also -5bps, as fixed income markets do their best to brush off busy starts to the week by established hawks including the ECB’s Holzmann (calling today for four more 50bps hikes) and continued general hawkishness from the Fed’s Daly in a speech on Saturday.  


    Today sees a smattering of second-tier data in the US (durable goods, factory orders) but they haven’t been flagged as particularly likely market-movers, leaving the possibility that positioning is supporting the market as much as anything else. Last week saw traders talking of how positioning in core global bond markets had shortened up after a weak February for fixed income (see Total Derivatives), and some strategists have picked up this theme as those bond markets seeming are trading less heavily since that recent peak.


    New issuance has made a reasonable early start to the week so far, with quite a hefty week of new deals expected with money said to be sloshing around the system in search of a home. This is reflected in swap spreads this morning which are lower across the curve. The 2y is -1bps at 8.75bps, 5y is -0.75bps at -19.375bps, 10y is -0.75bps at -26.5bps and the 30y is -0.875bps at -67.375bps. On the UST curve 2s/10s has bull-flattened by 2bps and 10s/30s by 0.5bp.



    Deutsche Bank: Sticking with swap spread steepeners

    Reviewing its outlook for swap spreads over the medium-term, strategists at Deutsche Bank said on Friday that they expect to see a broad steepening move on the ASW curve through 2023. It said that it expects “intermediate and long-end spreads to rise over the course of the year. In the front end we think risks skew toward lower spreads. The primary drivers of spreads – money market conditions for short-dated spreads and rates volatility for longer spreads – should evolve to support this view.”


    In the front end though, “the prospect of large bill issuance after a debt ceiling resolution, ongoing liquidity drain under QT, and a preference by the Fed to use backstop facilities to address transitory money market pressures are likely to narrow spreads. We also expect rate volatility to decline from last year’s extreme levels, benefitting from smaller rate hikes and as the Fed shifts from active policy tightening to being on-hold later this year. Lower volatility allows dealers and the broader relative-value community to reengage in long-spread positions, where the current negative values in 3.5y+ maturities create a positive carry opportunity, helping drive spreads back toward positive territory.”


    “Corporate issuance, a bearish factor for spreads, is also expected to decline as economic activity slows. The main risks to our view include an aggressive shift to long-end issuance by the Treasury in response to higher projected deficits, and early termination of QT could keep money market rates lower than otherwise.”


    New issues:

    • Lloyds Bank plans a USD-denominated, benchmark-sized perp NC7 AT1 sub at around 8.25% via BofA, Lloyds, MS (B&D), RBC and TorDom.   


    • Commonwealth Bank of Australia plans a fixed rate 3y USD at around USTs +95bps and a 3y FRN at SOFR equivalent. Via BofA, CBA, Citi, Goldman and JPM. Pricing expected today.


    • The African Development Bank has mandated Barclays, Credit Agricole, Deutsche, JPM and TorDom to lead a USD 5y Global to be launched and priced ‘in the near future.’ Price talk is SOFR +35bps.


    • NIB plans a USD 5y Global at around swaps +33bps via BoA, BMO, Nomura and RBC.


    • Shinhan Bank has mandated BNPP, BofA, Credit Agricole, JPM, SocGen and Standard Chartered to lead a USD-denominated bond following investor roadshows commencing Mar 13.


    • Air Lease Corp plans a 144A Sukuk at USTs +190bps via Bank ABC and Dubai Islamic Bank.