USD Swaps: Fed funds mystery; Hedgies make hay

Chart 24 Nov 2021
The UST curve is steeper ahead of the 30y reopening and tomorrow's mission-critical jobs data. Macro funds make hay while the sun shines.

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  • Steeper as 30y auction looms; Fed funds dips

  • Hedgies make hay while they can  

  • New issues


    Steeper as 30y auction looms; Fed funds dips

    The UST curve is a touch steeper with the 2y at 5.04% (-3bps) as tomorrow’s mission-critical jobs data draw closer. At the long end the 30y is 3.91% (+2bps) as the Treasury prepares to sell $18bn in reopened bonds following a poor 10y auction yesterday (see Total Derivatives). Meanwhile swap spreads are edging tighter with 5s at -21.25bps (-0.125), 10s at -27.50bps (-0.125) and 30s at -69.125bps (-0.25). Outright SOFR swap volumes are unspectacular according to the Total Derivatives SDR, with the 10y bucket strongest.


    In research, Barclays looks at the recent slippage in the Fed funds rate to trade at IORB-8bp, around a bp lower than 'normal'. The bank acknowledges that the decline is unexpected but suggests that it reflects “statistical noise” rather than a shift in the bargaining power of bank borrowers. Consequently, it reckons the decline in the rate is temporary as it explains:


      “The recent decline in the rate likely reflects a small shift in the traded volume that has tilted the median rate lower. This does not reflect a change in market fundamentals.”


      “As cleared bilateral repo rates have moved lower this year, the FHLBs may have started shifting more of their liquidity pool into the fed funds market at a lower rate. However, we are a little sceptical of the bargaining power argument. Fed funds trading volumes have been steady all year, and banks are looking to replace their lost deposit funding. We expect the fed funds rate to return to its 7bp spread to IORB.”


    Hedgies make hay while they can  

    Hedge funds are hiring with the aim of building their “macro firepower” according to the FT this week (link) as big moves in rates and inflation continue to produce opportunities for fast money in both quant and discretionary trading.


    The article says that Chris Rokos's fund is already up 6.5% this year after gaining more than 50% in 2022, and the fund wants to grow its assets by around $3bn from the current $15.5bn.


    At Brevan Howard, the BH Macro feeder fund was up a more modest 1.28% for the year to March 3 after a 0.31% gain for the first week of March offset a -0.29% loss for February.


    The underlying  Brevan Howard Master Fund ended January modestly long the very front end of the USD curve, short the 2y bucket and flat the long end, leaving it net slightly long USD rates. Total interest rate VaR (95%) fell to $21.6m while FX VaR rose to $24.1m as the fund increased its Asian currency short. Across other asset classes, the Master Fund’s Commodity VaR jumped to $13.5m at the end of January as the fund’s commodity long rose (it also went back to a small long in digital assets).


    New issues

    • Kenvue yesterday priced a $7.5bn 8-part ($750m 2y, $750m 3y, $1bn 5y, $1bn 7y, $1.25bn 10y, $750m 20y, $1.5bn 30y and $750m 40y). Leads are Citi, GS and JPM. A1/A.  +45bps, +60bps, +75bps, +85bps, +95bps, +100bps, +120bps, +135bps.