USD Swaps: Front end lifts: Bull steepening risk off

down chart red 26 May 2022
USTs jumped higher this afternoon as woes in banking stocks took center stage. The 30y auction tailed slightly, with strong stats.

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  • Front end lifts: Bull steepening risk off

  • New issues


    Front end lifts: Bull steepening risk off

    Treasuries jumped higher this afternoon as woes in banking stocks took center stage. The KBW Banking Index plunged more than 7.3% with SVB losing more than 60%. The 2y note yield is last 18.7bps lower at 4.883% while 2s10s jumped 12bps higher at -96.7bps and 5s30s gained 12bps to -33.3bps. Equities overall ended lower (DJIA -1.66%, S&P -1.63% and Nasdaq -2.05%).


    Turning to the final leg of this week's refunding, the $18bn 30y reopening saw a small 0.2bp tail versus the 1pm bid side, drawing a rate of 3.877%. The stats were stronger with higher indirects (70.7%) and directs (19.8%), leaving primary dealers with only 9.4% while the bid-to-cover was a decent 2.35x.


    As for today’s price action, one source suggested that the flows were the exclusive sort, with some in the know and others left in the dark, leaving many “scratching their heads” as to why – for example, whether today’s steepening rally has some origin in portfolio liquidations or otherwise.


    On the IG new issuance front, just $3.75bn priced today in a safe-haven utility sector took center stage, while one Yankee FIG also priced (HSBC coming with a $1.25bn 2y fixed).  Swap spreads narrowed in the wings versus widening in the belly amid mixed volumes.


    Meanwhile, looking at the level of the curve analysts at Deutsche now believe that the risk reward for bearish front-end positions “is becoming more tenuous” for a few reasons:


      “First, the decline in the (private sector) quit rate is consistent with further easing in the labour market. Indeed, the quit rate is now close to the 2.7% level we had pencilled in to enter outright steepeners in the US.”


      “Second, the forward real policy rate relative to (upwardly revised) estimates of neutral exceeds all previous tightening cycles with the exception of the late 70s. Unlike the late 70s, inflation expectations have remained broadly anchored. Therefore, it is not clear that a more restrictive monetary policy stance is required.”


      “Finally, the risks to US fiscal policy posed by the debt ceiling are likely to become more prominent in the months ahead.,”


    Strategically, Deutsche finds that a UST2s10s steepener is attractive “as there is 100bp+ gap between our current forecast and the forwards” - although it finds “tactically, there is enough uncertainty around the stickiness of underlying inflation that we choose to wait before initiating the trade.”


    2s 5.625bps (-1.75bps), 3s -8.75bps (-1bps), 5s -20.875bps (+0.375bps), 7s -30bps (+0.375bps), 10s -28bps (-0.5bps), 20s -63.5bps (-0.5bps), 30s -70bps (-1.25bps).



    New issues


    • OCI priced a $600m 10y benchmark. Leads MUFG, BofA and JPM.  Baa3/BBB-.  +280bps.


    • HSBC priced a $1.25bn 2y fixed benchmark.  A1/A-/A+. Self-led. +80bps. It dropped plans for a 2y FRN.


    • AEP Transmission priced a $700m 30y benchmark. Leads Scotia, BNYM, CS, MS and TSI.  A2/A-/A.  +157bps.


    • Kentucky Utilities priced an upsized $400m 10y FMB. Leads WFS, GS, MUFG and TSI.  A1/A. Upsized from $300m. +155bps.


    • Louisville Gas & Electric priced an upsized $400m 10y FMB. Leads WFS, GS, MUFG and TSI.  A1/A.  Upsized from $300m. +155bps.


    • Idaho Power priced an upsized $400m 30y. Leads JPM, USB and WFC.  A2/A-. Upsized from $350m. +170bps.