USD Swaps: Dominoes wobble on Monday the 13th; SOFRs +80 ticks!

Dominoes wobble on Monday the 13th

Hopes that the SVB panic that hit equities and sent bonds soaring on Friday would dissipate after the Fed/Treasury/FDIC rescue package over the weekend were shattered as soon as Asian markets opened for business. The 2y UST yield made perhaps the most eye-catching move across markets by dropping to a current level of 4.14%, -44bps from Friday’s close. Risk indicators are off the highs at the time of writing but remain deep in the red as President Biden pledges that "the banking system is safe." 

With deposit outflows leading to SVB and New York-based Signature Bank (boasting Barney Frank of Dodd-Frank Act fame among its board members) being placed into receivership on Sunday, and banks as far afield as Credit Suisse (-14%) and Commerzbank (-11.7%) suffering worrying share collapses today, it seems the moment for quiet reflection and damage limitation has passed. California’s First Republic Bank saw its share value drop more than 50% before the NY opening after offering a statement on Sunday reassuring investors about its liquidity status. We wonder where JP Morgan and the other big banks will decide to invest the billions of dollars of deposits heading their way from risk-averse corporate treasurers? And who would be a small bank shareholder or unsecured small bank bond investor at the moment, at least until the smoke clears?

Instead record-breaking moves in fixed income abound, while equities sink a further 3-4%% across major European bourses led by Italy and so far by 1% in the case of S&P 500 futures, ahead of the all-important US opening today. Oil prices are four dollars weaker and 5y TIPS breakevens are down 15bps. 

Key moves across fixed income markets today include a 44bps rally in 2y UST yields driving a huge curve steepening (25bps in 2s/10s, 35bps in 10s/30s), while across the pond 2y Schatz yields are nearly 60bps lower as rate hike expectations are slashed.

An array of subsequent unsettling headlines have taken the 2y yield down to its current 4.14% level, while away from the headline UST yields other moves are afoot. Swap spreads are crashing, led by the front end where the 2y is negative once more and 11bps lower at -9bps, 5y is -3bps at -26.375bps, 10y is -3bps at -32.5bps and the 30y is  -4bps at -76bps. In contrast, EUR asset swap spreads are 4-12bps wider on the back of safe haven flows.

In a trademark risk-off move the 3-month sector of the EUR/USD cross currency basis curve is down 10bps at -33.5bps after what has been described as “a panicky start” to the day saw it widen 15bps, in a move reflective of a rush for USD funding. While it is the biggest such one day move for a couple of years, outside of some of the quarter-end/year-end squeezes that have been regular features of the market since 2008, current ongoing high levels of USD liquidity have possibly saved it from an even deeper plunge.

There were no such limits to moves in Eurodollars where some contracts, those dated after the planned LIBOR end date of Jun 23, are now up by around 90bps while Sep SOFR futures are not far behind. The first IMM FRA/OIS spread jumped from 8bps to 62bps during the London morning early, and 3m USD LIBOR fell 27bps, its biggest move since Mar 2020.   

To summarize the standout moves, the 80bps move in the 2y UST yield since Thursday is the biggest two-day move since Black Monday in 1987, while German 2y yields are 55bps lower, their largest drop on record. In the very short-term the focus is to switch to Washington, where President Biden is setting out the measures being taken to protect the banking system, the sort of ‘don’t panic’ speech that could easily go either way.

BNPP: Tighter credit conditions, but Fed will still hike

Summarising the latest SVB-related events, strategists at BNPP noted overnight that:

• "The short term implication of the bank failure will be more competition for liquidity including rising deposit rates. The longer term implication will be tighter credit conditions, especially for corporate borrowers.

   

• The joint action from the Federal Reserve, U.S. Treasury Dept. and Federal Deposit Insurance Corporation (FDIC) reflects a multi-pronged approach to both alleviate concerns related to uninsured deposits at SVB and Signature Bank, while also easing liquidity pressures more broadly among depository institutions...At first glance, the proposed measures appear to be a formidable prescription to resolve funding risk, especially deposit flight. We believe these targeted, but forceful measures will avert the need to alter the course of monetary policy more broadly. As such, we continue to expect the Fed to hike 25bps in March.