USD Swaps: Pre-Fed flattening; Brevan; Fed vs crisis

Mild pre-Fed bear flattening  

An unexpected rise in UK CPI inflation to 10.4% weighed on European fixed income this morning with big losses at the front end of SONIA curve ahead of tomorrow’s BOE decision (whites are down up to 40 ticks) spilling over into Bunds (down a point) and even Treasuries.    

Thus SOFR futures are 1-5 ticks weaker ahead of the FOMC with losses led by the reds, while the UST curve is bear-flattening modestly on the back of a 5bps rise in 2y yields to 4.22%.  European bank shares (excluding UBS, following yesterday’s double-digit surge) are +0.5% to +2.0% although First Republic is -5% in pre-market trading with no further support for the bank yet confirmed beyond Yellen’s general comments about smaller banks and contagion risk yesterday. Wider stock indices are -0.1% for the S&P and +0.4% for the Euro Stoxx, while the CDX IG CDS index is little-changed.   

Swap flows are also unspectacular pre-Fed and mostly close to average but above-par in the 10y bucket. Swap spreads are narrowly mixed with 2s wider at 1.00bps (+1.00), 5s at -19.00bps (+0.25), 10s tighter at -25.75bps (-0.25) and 30s at -73.25bps (+0.25)

Brevan feeder fund down 3.9% in March  

In hedge fund news, the performance of Brevan Howard’s BH Macro feeder fund hints that the firm may have dodged the worst of the March madness despite a report on Bloomberg suggesting that Brevan had “grounded” at least three portfolio managers specialising in rates trading. 

BH Macro’s USD NAV fell by -1.32% in the week to March 10 and then by -2.80% in the week to March 17 to leave the fund -3.90% lower for the month to March 17, and down -2.97% for the year.

On Friday the Financial Times reported that Rokos Management was down “around 12.5%” in March while Bluecrest had lost “around 7%" this year and Caxton Macro had fallen 3% in March.

Note that Brevan’s underlying Master Fund was positioned only modestly net DV01 short at the end of February, and was long the very front end of the USD curve (see Total Derivatives) which may have limited the damage. Still,  the Master fund also said that a simulated re-run of the Lehman bankruptcy would have boosted its portfolio NAV by around 9%, which seems to underlines the difference to the current crisis.

It’s inflation not financial turmoil that matters most: Citi  

Fed funds futures are pricing around an 81% chance of a 25bps hike today, up from around 35% tested briefly on Monday as UBS and US regional bank shares initially sank in the wake of Credit Suisse’s arranged marriage.

The futures curve also prices a roughly 50% chance of a rate cut in July but this may be too dovish according to strategists at Citigroup. The bank reviews the Fed’s reaction to past financial crises including Savings & Loan and the failure of Continental Illinois in 1984, the stock market crash of October 1987, the Asian crisis of July 1997 and the failure of LTCM in September 1998. It concludes that the impact on Fed tightening is not clearcut, with inflation usually the priority. And 2023 is not 2008:

“The narrative that ‘once something breaks, the Fed brakes’ is exerting a powerful grip on markets. Banking sector concerns have interest rate markets pricing an abrupt end to the hiking cycle and a substantial probability of policy rate cuts.”

 

“The history is more nuanced – financial stability concerns often interrupt hiking cycles but do not always end them. Comparisons to 2008 are misleading. US financial stability issues are less widespread and more directly addressed by readily available liquidity tools. Relative to 2008 – or any time in the last 40 years of history – inflation is more of a constraint on Fed policy. Markets are substantially underestimating the likelihood that policy rates will move higher and then remain at higher levels for longer, in our view.”

New issues

• Korea National Oil (Aa2/AA) plans USD 3y, 5y and 10y bonds via Citi, CA, HSBC and Mizuho.

   

• Panama  yesterday priced a $1.8bn 2-part ($800m 2035 tap 6.4% 2/14/35 and a $1bn 31y fixed). Leads are GS and Scotia.  +255bps and +312.5bps.