USD Swaps: Fraught, ugly, illiquid pounding aftershocks
Fraught, ugly, illiquid pounding aftershocks
The dust has not settled on the massive moves in USTs since the shockwave of SVB’s collapse and the subsequent Fed/Treasury/FDIC liquidity backstop and the market ended with an ugly finish into the close. The KBW Banking Index lost 11.5% while First Republic banking shares are down 60.5%. Front ED Sep ended up a full 1.1% while front Dec is up 97pts. The 2y note yield is last 59.5bps lower at 4% while the 10y is down 16bps to 3.543%. Broader equity indexes ended with relatively minor gains/losses (DJIA -0.28%, S&P -0.02% and Nasdaq +0.45%)
Looking at the debacle of SVB, one source remarked that while the concentration of depositors is unique, the fear is that “nobody knows and that is a probably not just them." Further, the source blamed the era of ultra-low rates, saying the current crisis "is a consequence of policy allowing rates to stay less than 2% in the long end.” Meanwhile, the Fed announced that it was launching an internal review of the supervision of SVB, with results to be released May 1st.
Swap spreads plunged in the front end of the curve, with the 2y spread dropping more than 15bps intraday with an accelerating finish lower amid strong volumes. The lack of credit component in SOFR has been starkly illustrated in the past couple of sessions, sources note, and further, analysts at Barclays highlight that the “unwinding of SOFR shorts and a decrease in short interest in front-end Treasuries” has pressured short end spreads while they “have been largely directional with duration.”
Ahead of CPI tomorrow - with economic data taking a backseat to the turmoil in the banking sector - the probability of a March Fed hike has morphed to a 64% chance of a 25bps hike and 36% of no hike, after seeing as much as 70% probability of a 50bps hike last week mid-week post-Powell.
Meanwhile analysts at Citigroup believe that the uncertainty around bank balance sheets means that:
In the medium to longer term, “if our recession model turns out to be right and it is currently signaling a 68% probability of a recession in the next 12 months, then the reach for duration will re-assert itself” and “if investors start worrying about credit risks in the economy, the banking sector may not be out of the woods yet.”
Thus, “the positive correlation between Treasury yields and bank sector performance will likely re-assert itself, which means that demand for Treasuries from the broader investor base will increase,” Citigroup asserts.
2s -11.25bps (-13.5bps), 3s -19.25bps (-5.25bps), 5s -24.75bps (-1.375bps), 7s -32.25bps (+0.5bps), 10s -28.375bps (+1.25bps), 20s -65.5bps (+0.25bps), 30s -72.5bps (-0.5bps).
For a complete review of issuance over the past week, please see USD New Issues.