USD Swaps: Dominoes bounce; Red SOFRs -40 ticks

Dominoes bounce; Red SOFRs -40 ticks

A correction to yesterday’s dash for safety and rush to cover shorts has followed a morning of big swings in the front end. 2y UST yields have backed up by 28bp to 4.26% at the time of writing, bear flattening 2s/10s by 23bps as traders gauge the impact of the inflation prints (0.4%/6.0% headline and 0.5%/5.5% core, close to expectations) , after the market traded NSA CPI a touch lower at 5.97922% last yesterday versus the 6.05% Bloomberg survey consensus. Euro swappers in London confirmed “big stop outs” for hedge fund on Monday and volatility continues with Dec23 SOFR futures already having traded from a session high of 96.25 early doors down to 95.69 (-40 ticks) currently.  Basis is narrower with first IMM FRA-OIS 22bps lower while EUR/USD 3m is 16bps tighter.  

In risk assets S&P futures are +0.8% and even First Republic shares are up pre-market, backing up the recovery story and reduction in contagion fear. Still, with Japanese bank shares down by 5% to 10% today and Credit Suisse another 1% lower, while deposits flood into the GSIB banks, infection fears have not disappeared following the Fed's vaccine program.  Issuers have yet to poke their heads back above the parapet in either USD or EUR while dollar swap spreads are snapping back wider with 2s at -3.5bps (+8.00), 5s at -20.25bps (+4.25), 10s at -25.00bps (+3.25) and 30s at -71.25bps (+1.50). Outright swap volumes are strongly above average out to 10y but highest at the front end.

In the news, JP Morgan’s latest Treasury Client survey sent mixed messages about positioning with the ‘All Clients’ balance moving to a net long of +8% in the week to March 13, its highest print since August 2012 and up from -4% in the previous week. However, the ‘Active Clients’ balance was, confusingly, less active but the net long reading there became positive last week and held at an unchanged at +11%.

Ahead, Apr23 Fed funds is down 5.5bps at 4.77% (implied) and Dec23 has sold off to 4.32% as rate hikes get put back into the curve, despite some high profile banks changing their views to ‘no change’ for March in the wake of recent market turmoil and de facto tightening in financial conditions.  Deutsche Bank, in contrast, stuck with its forecast of a 25bps rate hike this month but lowered its terminal rate and upped the chances of recession:

“We have for now maintained our expectation for a 25bp hike at the March meeting but see this as a close call. While in real-time risk management could argue for pausing, we also know that the markets and macro backdrop can shift quickly. We will finalize our view on the March FOMC outcome after observing this week’s developments.

 

“That said, tighter financial conditions and risks to financial stability argue that ‘sufficiently restrictive’ may be coming into view and that the terminal rate could be materially lower. We now peg the peak fed funds rate at 5.125% (versus our previous forecast of 5.625%). In contrast to the substantial uncertainty about the Fed outlook, recent events have strengthened our conviction for at least a moderate recession beginning by year end, if not sooner.”

New issues

• FHLB yesterday priced $88.7bn in FRNs comprising $38.8bn 3m, $24.5bn 4m, $17.3bn 6m, $5.3bn 8m and $3bn 12m. Priced at SOFR +8, 8.5, 9, 9.5 and 12bps respectively. Leads are Barclays, Nomura, WFS and Citi.