USD Swaps: USTs slip; Banks on Fed's next moves

Flatter as yields rise from post-FOMC lows

Yields are backing up by a few bps in early trading with the rise from overnight post-FOMC yield lows led by the 2y at 3.98% (+4bps), still around 20bps lower than before the Fed delivered a dovish hike and helped, along with Yellen, to bull-steepen the curve (see Total Derivatives). SOFR futures are mixed with whites 1-4bps higher while reds are about the same lower, while swap spreads are mostly wider beyond the very front end with 2s at 1.25bps (-0.50), 5s at -18.75bps (+0.50), 10s at -26.00bps (+0.50) and 30s at -71.25bps (+0.75). Swap volumes are currently mixed but flows in the 5y to 10y sector are currently running modestly above average.

In the news, the BOE announced a widely expected 25bps hike in rates to 4.25% following a 7-2 vote by the MPC and a pop in the inflation data released yesterday. The BOE's statement hinted that rates could be near a peak, suggesting further tightening was conditional on "if there were to be evidence of more persistent (inflationary) pressures." However, the MPC also pointed to its next full set of forecasts, due in May. SONIA forwards for the May23 meeting are so far little-changed at 4.35% and Dec23 are equally steady at 4.39%   

European bank shares are +0.3% to -3.8% with the decliners led by UBS (-3.8%) and HSBC (-2.9%). First Republic is +6.2% pre-market after comments by the Treasury Secretary sparked a 15% slide on Wednesday. There is nothing definite yet about further support for either FRC or the smaller banks generally.    

Fed peak close, steepeners favoured: Banks  

Banks review the Fed meeting. Most see one more 25bps hike and then a pause but warn of heightened uncertainty given the pressure on smaller banks and the gap between the forwards and the dots. Some prefer steepeners.  

• BNP Paribas: “The Fed will likely need to ‘do less’. Therefore, we are putting our prior forecast for the terminal funds rate (of 5.75%) - which was  established before the collapse of Silicon Valley Bank - under review…Nearer term, we think still-too-hot macro conditions and some encouraging signs that policymakers’ actions have alleviated acute stress among smaller regional banks could pave the way for additional Fed tightening…We think the Fed will raise rates by an additional 25bp on 3 May - but we stress that this is a low-conviction call….Favor curve steepening and expect 2s/10s UST to reach 0bp in Q1 2024, which is when we expect the Fed to begin cutting rates. Notably, we can see the curve both bull and bear steepening from here. In the former case, if the credit impulse from the US regional bank turmoil is strong, the Fed may cut rates more (and potentially earlier) than is currently priced. Conversely, if the economy remains stronger and markets view the Fed as reaching a lower terminal rate than only two weeks ago, inflation risk and term premium may lead to steepening, led by the longer end of the yield curve. “

   

• Deutsche Bank: “The Fed anticipates that a tightening of credit conditions most likely will weigh on the economy and substitute for some additional rate hikes…We maintain a terminal rate view of 5.1% delivered with one more 25bp rate hike in May…If the anticipated tightening from credit conditions does not materialize, and/or inflation continues to surprise to the upside, the Fed will have to raise rates to a higher level to achieve a policy stance that is  ‘sufficiently restrictive’.”

   

• Barclays: “We maintain our rate call unchanged. We expect the FOMC to hike another 25bp in May, bringing the funds rate target range to 5.00-5.25%. We then expect it to pause and maintain this range through the rest of the year…The FOMC will need to maintain rates at their peak for a while, in order for inflation pressures to diminish, even with a recession taking place in the second half of the year, under our baseline forecast.”

   

• Commerzbank: “Powell sounded much less determined to raise rates further in order to rein in inflation…For year-end, forwards are now back below 4.25%, almost a full point below the new median dot, where individual FOMC members even revised up their expectations. Markets are pricing about a 50% chance for another 25bp in May and a corresponding peak rate of 5.25% - as well as some 70bp in cuts from June to December”

Callables and Formosas: ANZ 20y NC7

• ANZ sold a $100m 20y NC7 zero coupon callable (non-Formosa). The EMTN matures Mar 2043, is callable in Mar 2030, Mar 2035 and Mar 2040, and has an estimated IRR of 4.93%. Self-led and announced Mar 23.  

New issues

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