USD Swaps: 5y leads after ECB's mixed messaging; Too soon to short?
USTs rally as ECB hikes 50bps, sends mixed messages on bank risk
The relatively modest moves in yields, spreads and bank stocks (ex. Credit Suisse) today suggest that the SNB’s move to provide a liquidity backstop to buy time for CS has been successful so far, with CS shares +21%. However, the UST curve’s 5y led rally has extended after the ECB raised rates by a full 50bps. The central bank didn't announce any new liquidity measures but contended that its “policy toolkit” was “fully equipped” to provide liquidity support to the Eurozone’s financial sector, if required (see link).
The Euro Stoxx banks index was edging into the red even before the ECB decision after headlines suggested that ECB Vice President Luis de Guindos had warned ministers this week that some EU banks could be ‘vulnerable’. That contrasted with the official statement from the ECB today, which said that the euro area banking sector is “resilient, with strong capital and liquidity positions.” Banks other than CS have slipped from opening highs with both Commerzbank and SocGen back in the red, albeit only by 1-2%. Similarly, Bunds are well off session lows as the EUR curve has pared losses and flattened. EURIBORs are 14-15bps higher in the reds but down in the front whites after some speculation that the ECB would limit its hikes to 25bps given recent market turmoil.
Treasury yields are -1bps in 2y, -7bps in 5y and -3bps 30y following a renewed surge of concern about dollar rate market liquidity yesterday (see Total Derivatives). SOFR futures are -4bps in the front whites but +7-12bps in the reds and swap spreads are tighter again but led by the belly this time in choppy trading with 2s at -3.25bps (-0.25), 5s at -17.25bps (-0.75), 10s at -23.25bps (-0.75) and 30s at -68.75bps (-0.50). Outright swap flows are mostly above average but strongest in the 2y and 10y buckets.
Brevan ended February flat but lost money in early March
Talk of shorts getting stopped out during the turmoil of the last seven days spurs interest in hedge fund returns. Brevan Howard’s BH Macro feeder fund fell by -1.21% in the month to March 10th to pull its performance for the year to date into negative territory, at -0.25%.
Still, the underlying Master Fund was only modestly DV01 net short at the end of February, with a long at the very front (3m bucket) of the USD curve and in 2y GBP more than offset by DV01 shorts in 2y USD and 10y+ JPY. And while its interest rate VaR (95%) rose to $26.1m in February from $21.6m in January, the biggest VaR move was a drop in FX risk where the Master Fund increased its dollar long against Asian currencies but cut FX VaR back to $7.5m. The fund went slightly short equites but stayed long digital assets and commodities.
Quick recovery or lingering pain? Banks
Meanwhile in the research landing in the wake of this week’s CriSis, Barclays advises its clients that:
- “A potential reduction in tail risks from an SNB lifeline can lead to price shifts that last/persist. At the very least, the market would need to price out emergency cuts from G10 curves. The quicker and the more decisive the fix, the more likely it is that curves start to price in the extension of the tightening cycle – even if rates expectations do not reach the heights seen during Powell’s Jackson Hole speech.”
On the other hand, if Barclays is wrong and central banks do not fulfil their function as lender of last resort soon, then:
- “Further curve steepening would be likely, especially in the US. At some point, markets will start to worry that central banks (especially the Fed) are caught between the need to support the Western financial system and fighting inflation and are unable to do the latter effectively. Of course, in this scenario, risk assets (especially US equities) would likely have far more room to re-price lower.”
Elsewhere, Citigroup is less sure that central banks can rapidly stop the volatility and thus recommends against shorting duration, citing sentiment and risk management:
- “We continue to caution against shorting duration. The primary macro motivators for shorting duration are backward-looking at this point (e.g. inflation, consumer spending, employment data) and we think the risk of turns in these data points in the future is high. Sentiment is very likely taking a hit with headlines around bank failures this month, which will be evident only in data in the coming months. Positioning is another risk factor to consider.”
“The lack of gratification from paying rates would end up discouraging paying flows from the levered investor base from a pure risk management/capital preservation angle. When the beta of swap spreads to rates starts decreasing, it could be taken as an indication that levered/swap unwinds are coming to an end. We seem to have reached that point… So, while positioning is likely cleaner, there would likely be greater reluctance to pay rates from a risk management standpoint.”
New issues: NIB ZC
- Nordic Investment Bank (NIB) sold a $80m 20y NC6 zero coupon callable (non-Formosa). The EMTN matures Mar 2043, is callable once in Mar 2029 and has an estimated IRR of 4.901%. Announced Mar 15 and lead is Deutsche Bank.