USD Swaps: Slight bear flattening into FOMC; Surveys say…

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Slight bear flattening into FOMC; Surveys say…

Fed Day has finally arrived and it will tell us whether the Fed currently plans to move this hiking cycle into a second year – and if so, at what pace.  And heading into today’s main event, rate market participants seem to be ebbing towards hawkish headlines to hit the tape this afternoon as front-end rates – while off their earlier peaks – remain higher on the day thus far.

Indeed, the benchmark 2y note yield is last 4bps higher at 4.21%, leaving the 2s10s spread 4.8bps narrower as longer rates have managed to nudge their way modestly lower today.  Similarly, the SOFR futures curve is also flattening with the reds up to 4 ticks softer while the greens are up to 2.5 ticks firmer. Still, Fed funds futures are pricing in a roughly 82.4% chance of a 25bps hike today, up significantly from the 35% priced in at the height of banking angst earlier in the week despite some of this angst still lingering in the backdrop. Indeed, regional bank PacWest announced today it secured a $1.4bn financing facility from Atlas Partners in the wake of a 20% drop in deposits this year. 

In swaps, spreads are mixed with the wings outperforming while activity has remained underwhelming – if best seen at the 10y point thus far – as market participants await this afternoon’s FOMC decision.  And in the backdrop, IG issuance has also taken a pause after yesterday’s $5.75bn burst in deal flow despite a relatively stable risk backdrop (Dow -0.03%, S&P +0.16%, Nasdaq +0.12%).

Ahead of an important FOMC meeting, where expectations run the gamut from cut to hold to hike - economist's at BofA call for “a jittery 25bp hike” - and with markets dizzy from the relentless 'narrative pivoting' over the past months, and the aggressive repricing over the past weeks, the bank takes a look at what its surveys and signals are telling it below, if only to get its bearings before the next big event:

”… Both our FX and Rates Sentiment Survey (FXRS) and Global Fund Manager Survey (GFMS) show investors reducing risk, while fund flows show significant cash inflows. Focusing on Fixed Income investors, the FXRS results show investors adding to duration and cutting EM FX longs back to neutral. Neither positioning nor sentiment moves were as dramatic as might have been expected given the event backdrop, however - rates volatility hit crisis levels - suggesting moves so far were primarily 'fast money' driven. With FX trends still mixed, drawdowns were more concentrated in rates trend and FX carry strategies. Positioning adjustment is not done, perhaps especially in FX, with the Fed being the likely trigger for the next move, and investors no longer expecting a single-minded pursuit of a return to 2% inflation.” 

Similarly, strategists at Deutsche Bank also rolled a survey out to their clients to see what they think the Fed should and what it will do this afternoon where they found some differences of opinion:

”… Whilst 86% of you think they will hike 25bps today, only 53% think they 'should' do that. 25% think they should hold steady, with 4% thinking a cut would be appropriate. Meanwhile, 18% think they should actually hike 50bps. So, at the wings there is disagreement about which direction the Fed should take policy with a majority thinking they are making a policy error assuming they hike today.”

Currently, SOFR swaps – 2s 0.25bps (+0.5bps), 3s -10.125bps (+2bps), 5s -19.5bps (-0.375bps), 7s -28bps (-0.625bps), 10s -26bps (-0.375bps), 20s -67bps (-0.5bps), 30s -72.5bps (+0.875bps).

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