USD Swaps: NFP plays second fiddle to SVB; Uber-bull-steepening persists

Stock falling man 12 Aug 2020
Today’s NFP data has played second fiddle to SVB’s increasing woes and fear of contagion that are aggressively bull-steepening USTs again.

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  • NFP plays second fiddle to SVB; Uber-bull-steepening persists

  • NatWest: Gradually, then Suddenly - PCA weighed 10s30s steepeners


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    NFP plays second fiddle to SVB; Uber-bull-steepening persists

    This morning’s February non-farm payrolls release had juicy morsels for just about everyone.  To be sure, for the rate market bears/hawks, the headline print came in at a hotter-than-expected +311k (versus +225k Bloomberg consensus).  And for the rate market bulls/doves, the unemployment rate unexpectedly ticked up to 3.6% (versus 3.4% consensus) while those prickly pricing pressures eased a bit as average hourly earnings unexpectedly ticked down to 0.2% (versus 0.3% consensus).


    However, on a day that many expected to see the payrolls data as the end all and be all driving today’s price action, Silicon Valley Bank’s (SVB) increasing woes (see here) and the resultant fears of financial contagion – whether misplaced or not (see Total Derivatives) - continue to suck up all the oxygen in the room and drive rates sharply lower for the second day in a row. 


    And reflecting on the histrionic price action over the past 24 hours, one source judged that “it’s mostly been a defensive move.”  He explained that rate market “shorts are being torched and being force to cover but at the end of the day, traders will still be left with more questions than answers” regarding any broader lasting adverse impact on the financial sector.


    Against this backdrop, Treasuries remain in uber-bull-steepening mode with the benchmark 2y note another 25bps lower at 4.62% after having popped about the much-ballyhooed 5% level a mere three days ago.  Similarly, further out the curve, the 4% level in 10s now looks like a distant memory as the 10y yield is down another 20.5bps today at 3.699%. 


    Meanwhile, in the SOFR futures trading pits, reds and greens are up a whopping 20.5 to 43.5 ticks with the Mar24 contract leading the charge.  Accordingly, SOFR spreads have collapses at the front-end with the spread curve steepening amid a solid jump in activity in all but the 1y and 5y sectors.


    Currently, SOFR swaps – 2s 1bps (-3.625bps), 3s -14bps (-4.375bps), 5s -22.875bps (-1.5bps), 7s -32.375bps (-2.375bps), 10s -29bps (-1.125bps), 20s -64.625bps (-0.875bps), 30s -71.125bps (-1bps).



    NatWest: Gradually, then Suddenly - PCA weighed 10s30s steepeners

    More broadly, this past week was an extremely volatile one, driven by Chair Powell’s Congressional testimony, nonfarm payrolls, and market concerns about troubles within the banking sector.  And on net, strategists at NatWest note that “treasuries managed to finish the week lower on yields, despite parts of the curve reaching their cycle highs.”  Ahead of the all-important February CPI data next Tuesday, NatWest recaps the past week below and looks at trades that could benefit from volatility-driven dislocations in the curve – PCA weighed 10s30s steepeners look attractive, in the bank’s view:


      ”…The first key event this week, Powell’s semi-annual testimony to Congress, had a hawkish lean to it, mainly through the prepared remarks as the Chair pointed out that ‘If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes’ and ‘the ultimate level of interest rates is likely to be higher than previously anticipated’. Rightly, markets perceived that as Powell bringing 50bps to the table and even pricing odds in a way that implied that a decision was more likely to have been made, rather than debated. Overall, the front end sold off very heavily and markets priced in some odds of Fed funds peaking over 6% following the testimony.


      “…The second day of the testimony, this time in front of the House Financial Services Committee, also did not bring any fireworks. However, the opening remarks, which are typically unchanged, were slightly tweaked (only verbally by Powell). In repeating the line we quoted above, Powell explicitly pointed out that “I stress that no decision has been made on this…”’with regards to 50bps and later pointed to 4 data points to look out for: JOLTS (which showed some slow down, but not as much as expectations), Nonfarm payrolls (which had strong headline growth but softer wages and internals), CPI, and PPI.


      “…The second key event of the week was the NFP report, which saw a stronger than consensus headline at 311k (though whisper was approaching 250-300k in our opinion) but softer internals such as wages, workweek, and the unemployment rate – all flagged by Brainard for example as potential signs of slack in a labor hoarding environment. So while the data was ‘officially’ mixed, given rising expectations/fears into the data, on net it may have been softer than true consensus.


      “…Still, it was objectively mixed, which means when looking at the ‘totality of the data’, the debate between 25bps and 50bps for the March FOMC meeting is not settled. Arguably this places a larger weight now on CPI and PPI, the other data points flagged by Powell (we would add retail sales to that as well). In addition, financial market stability is now an issue, given heightened concerns around SVB bank, which if still ongoing, could argue for a lean to 25bps. If there is contagion or ongoing asset value concerns in the banking system into the FOMC meeting, aggressively higher policy rates are not the cure for an unstable banking system, though that is not our base case for this situation.


      “…With all of the volatility in the curve over the past days, we looked at dislocations across tenors that are less directional by nature. Using the SOFR swaps curve as the universe, we applied a PCA framework to identify attractive points. At current levels, a PCA weighed 10s30s spread looks flat to us. The weights of the 10s30s wouldn’t be PVBP matched, but rather PCA weighed instead. In this case, we enter a 77:100 weighed 10s30s (where the 10y is assigned the 77 weight and the 30y is 100). Given the PCA weights, the trade is designed to be mean reverting by nature and is isolated from directionality.”