USD Swaps: Pre-Powell prep; Caution on risky assets

Federal Reserve front
Pre-Powell prep has seen yields fall by a couple of bps across the curve while spreads are narrowly mixed.

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  • Pre-Powell prep

  • Higher for longer to pressure risk assets: Barclays

  • Callables and Formosas: JPM

  • New issues: AfDb, NIB


    Pre-Powell prep

    Treasury yields are a couple of bps lower across the cure ahead of Jerome Powell’s testimony to the Senate Banking Panel with economists at BNP Paribas expecting the Fed Chair to keep his prepared remarks “direct and narrowly focused on combating inflation, echoing last year's succinct message at Jackson Hole.” The bank adds that Powell may “hold short of stating a preference for either 25bp or 50bp at the coming meeting, falling back on data dependence ahead of two key reports,” for jobs and CPI.


    Elsewhere, WSJ Fedwatcher Nick Timiraos expects the Fed chief to “caution” that “strong economic activity this year" could lead the FOMC to "raise interest rates more than they expected to combat high inflation.”


    In swaps, spreads have steadied after yesterday’s deal-led tightening with 5s at -20.00bps (-0.125), 10s at -27.00bps (+0.25) and 30s at -67.25bps (+0.125). Outright SOFR swap volumes are below average.


    Higher for longer to pressure risk assets: Barclays

    With S&P futures edging into the green by around 0.1% in early trading today, macro analysts at Barclays consider the implications of recent stronger-than-expected growth and inflation data. On balance, they recommend positioning for weaker risk assets:


      “A new growth mini-cycle might be forming, sparked by China’s re-opening…As manufacturing has rebounded, goods disinflation is fading…Markets have responded with ‘even higher for even longer’, but it might still not be enough”


      “Central bankers are not fighting the move higher (in rates)…The risks to (rates) market pricing are still to the upside.”


      “2023’s data has pushed imminent recession worries into the background, a risk positive. (However) we think the ‘higher for longer’ rates impulse is far more important for valuations. This is especially true for US equities, which trade at elevated multiples to Europe and Asia. Meanwhile, China’s 5% growth target should disappoint growth-sensitive investors”


      “Any surprises in Kuroda’s last BoJ meeting this week pose downside risk to bonds and stocks. As we approach payrolls, we note that US hard data has surprised forecasts to the upside all year. The bar for a 50bp Fed hike in March is high…but attainable. Strong jobs (over 200k) and core CPI (over 0.4% m/m) would meet the bar.”


      “Chair Powell’s testimony this week should be hawkish, in contrast to the Jan presser. We recommend investors position for a drop in risk assets going into this week”


    Callables and Formosas: JPM  

    • JP Morgan sold a $30m 20y NC7 zero coupon callable (non-Formosa). The EMTN matures Mar 2043, is callable annually from Mar 2030 and has an estimated IRR of 5.105%. Self-led and announced Mar 6.


    New issues: AfDB, NIB

    • The African Development Bank (AfDB) has mandated Barclays, Credit Agricole, Deutsche, JPM and TorDom to lead a $2bn 5y Global. Swaps +33bps.


    • NIB plans a USD 5y Global at swaps +30bps. Leads are BofA, BMO, Nomura and RBC. Aaa/AAA.


    • Islamic Development Bank is preparing a USD 5y Sukuk at swaps +55bps. Leads are BNPP, Citi, BARWA, ENBD, HSBC, ISLDEV, SMBC Nikko, SocGen and StanChart (B&D).


    • Avery Dennison yesterday priced an upsized $400m 10y. Baa2/BBB. +183bps.


    • Santander Holdings USA yesterday priced a $1bn 6y NC5 . Leads are Barclays, DB, RBC and Santander. Baa3/BBB+/BBB+. +223bps.