USD Swaps: Whippy reversal to bear flattening; Pressure, uncertainty

Financial chart 24 Nov 2021
Although the UST rally this morning reversed and IG new issuance reopened, other market health signals flashed red.

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  • Whippy reversal to bear flattening; Pressure, uncertainty 

  • FHLB advances a record high  - Barclays

  • New issues  


    Whippy reversal to bear flattening; Pressure, uncertainty

    Treasury yields rose around 5 to 11bps into the close, after seeing this morning’s risk-off rally of up to 30bps erase and then some. The 10y note yield is last 6bps higher in yield at 3.498% after dropping down at 3.286% earlier today. The 2y is last at 3.968% (11bps higher) from a morning low of 3.628%.


    As for the curve, 2s10s is last 6.3bps lower at -47.4bps after hitting a steep of -33bps this morning while 5s30s is 3.8bps flatter at +8.2bps from an intraday high of +24.8bps.


    Equities are ending higher (DJIA +1.2%, S&P +0.89% and Nasdaq +0.39%). First Republic shares dived back down, closing 47.3% lower – near the lows of the day, after the second downgrade in a week by S&P. Earlier, the WSJ reported talks led by JP Morgan to converting some of the $30bn in recent bank deposits from the consortium of banks into capital (see link).


    Meanwhile very short dated volatility skyrocketed, with for example, 1m1y volatility rising to over 300 annualized (around 20bp/day) – a record high (see link). Front end swap spreads came off the tights of the day as the rally in USTs reversed out. For example, the 2y spread hit a low near -7bps but then rose to end the session around -2bps. Further out, belly and long end spreads narrowed progressively. Overall volumes were well above average with exception of the very long end.   


    On the supply side, two utility names managed to reopen the IG new issuance market after six consecutive shut outs. Tomorrow sees the first UST auction since the banking crisis with $12bn 20y on the chopping block.


    2s -2.25bps (+1.75bps), 3s -13.25bps (+2.25bps), 5s -20.25bps (-1.5bps), 7s -29.625bps (-0.75bps), 10s -26.75bps (-1.25bps), 20s -68.75bps (-2.125bps), 30s -74bps (-1.5bps).



    FHLB advances a record high  - Barclays

    This afternoon Bloomberg reported that FHLB issued $304bn last week, roughly matching the figures that analysts at Barclays had estimated ($300bn).


    Barclays highlights that an increase of $300bn “would push outstanding advances to a record” and “outstandings would be 12% above their financial crisis peak and about 40% larger than they reached during COVID.”


    To be sure, Barclays highlights that this borrowing occurred after the Fed's BTFP liquidity program was created and despite heavy use of the discount window. “Discount window loans – including those to the failed banks – totaled nearly $300bn on Wednesday afternoon” and Barclays suggests that most of this borrowing was connected to the banks that failed last weekend, with all of this borrowing “shorter than 15d.”


      ”Other banks, however, preferred to use advances to finance or build up precautionary liquidity buffers ahead of deposit outflows. It is too early to know which is the case, as the Fed's most granular data are reported with a one-week lag, and the data may be blurred by flows from large regional banks to GSIBs. That said, our sense is that the preference for advances reflects two considerations. First, we believe there is still some stigma associated with borrowing from the Fed's discount window. Although the Fed does not 'name names' for two years, would-be borrowers may be fearful of explaining their funding needs to a regulator. Second, the haircuts on the whole loans pledged for an FHLB advance may be lower than those for the Fed's discount window."


    Barclays suspects that it is banks' activity-based capital requirements that will determine just how much further advances can grow:


      ”For example, if we assume deposit outflows at the non-GSIB banks accelerate and grow to one third of their un-insured deposit base (or $1trn), then these banks would need to contribute an additional $40-50bn in capital to the FHLB. Keep in mind that last week's $300bn increase in advances likely already required an additional $15bn or so capital contribution to the FHLB.”


      “Of course, banks are likely to get all of their capital back once they pay off their advances and deposit outflows slow. But for banks with more limited capital resources and less capacity to sell assets to meet outflows, securing advances might become increasingly difficult. And this could force more institutions to shrink their balance sheets or to go to the discount window regardless of the perceived stigma.”


    New issues

    For a review of issuance trends in the past week, please see USD New Issues.


    • Duke Energy Ohio priced a $750m 2-part FMB ($375m 10y and $375m 30y). Leads BNPP, Citi, PNC, Santander and TD. A2/A. +175bps and +200bps.


    • CenterPoint Energy Houston priced a $900m 2-part ($600m 10y and $300m 30y green). Leads MUFG, CS, BofA , BNPP and RBCCM. A2/A/A. +150bps and +165bps.