USD Swaps: $30bn infusion for First Republic; Recovery?
$30bn infusion for First Republic; Recovery?
Treasury yields are climbing higher as First Republic received a total of $30bn uninsured deposits from a consortium of banks - including JP Morgan, Citigroup, Bank of America, Wells Fargo ($5bn each), and Morgan Stanley and Goldman Sachs ($2.5bn each). First Republic shares closed up +9.98% after dropping 36% earlier today. However, elsewhere the Fed reported late today that discount window borrowing rose to a record $153bn for the week ending March 15th (and is higher than the $111bn seen during the GFC, sources note) while the new Bank Term Funding Program this afternoon showed borrowing of $11.9bn.
The 2y note yield is last 27bps higher at 4.161% while the 10y note yield is last 11.3bps higher at 3.575%. The KBW Banking index closed +2.47% while the broader equity indexes rose (DJIA +1.17%, S&P +1.72% and Nasdaq +2.48%). The futures market is currently pricing in an 80.5% chance of a 25bps hike, up from 54.6% yesterday at the close, according to the CME Fed Watch Tool.
The swap spread curve flattened with front end spreads widening out modestly versus belly and longer end spreads tighter on the day amid mixed volumes. Meanwhile, the IG new issuance market is likely to see no issuance for the week, the first weekly zero since June 2022 (during a post CPI bond rout). On the options side, this morning saw increasing demand to protect against lower rates in the 10y part of the curve, but the demand has since eased somewhat (see Total Derivatives).
Meanwhile, Brevan Howard ground some of its traders due to maximum losses incurred in the wake of the recent bond volatility, Bloomberg reported today. And amid yesterday’s high volatility, analysts at JP Morgan see Treasury market depth “remains depressed at levels last seen in the middle of March 2020, during the worst of the COVID-19 crisis.” On a volatility-adjusted basis, JP Morgan notes that “the magnitude of recent decline in 2-year yields is one of the largest this century.”
“Importantly, this decline in liquidity is broad-based in nature, though it is notable that front-end depth has fallen to new lows” and “while this indicates liquidity is impaired, we do not see Treasury market functioning as being compromised to the extent we observed this time three years ago,” the bank assesses.
Indeed, as it has noted previously, JP Morgan believes that this illiquidity “has been rooted in uncertainty over the path for monetary policy” and as a reminder “just a week ago, market participants were considering one or more 50bp Fed hikes following Chair Powell’s comments, while markets are now pricing only 50% probability of a 25bp hike next week and more than 100bp of easing over the balance of 2023.”
2s -0.875bps (+2.25bps), 3s -11bps (+2.25bps), 5s -17.75bps (-1.25bps), 7s -27.5bps (-1.875bps), 10s -24.25bps (-1.75bps), 20s -63.625bps (-3.375bps), 30s -70.625bps (-2.5bps).