USD Swaps: Steepener entrenched post-FOMC; 10y TIPS auction previews

Steep rock climb 25 Mar 2021
USTs are mixed but the curve continues to steepen in the wake of yesterday’s FOMC decision. Dealers and sources preview today’s 10y TIPS auction.

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  • Steepener entrenched post-FOMC; 10y TIPS auction previews

  • New Issues


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    Steepener entrenched post-FOMC; 10y TIPS auction previews

     The major domestic equity indices are solidly in the black (Dow +1.44%, S&P +1.53%, Nasdaq +2.43%) as market participants continue to digest yesterday’s 25bps Fed rate hike and Treasury Secretary Yellen’s comments on blanket deposit insurance. Meanwhile, UST yields are mixed as the front-end has edged into to black as curve steepening persists.


    The benchmark 2y note yield is last 2.4bps lower at 3.913% while the 2s10s spread is 6.2bps wider at -44.5bps.  SOFR futures are 8.5 to 10 ticks firmer in the reds and the greens while swaps spreads are narrowly mixed with swap volumes running at a decent clip in the 7y-30y sector today. Elsewhere, IG issuance has snapped back to life after yesterday’s FOMC pause with deals from UnitedHealth, Marriot International and AIG coming to market today.


    Ahead, Treasury will auction $15bn reopened 10y TIPS (TIIJAN33s), unchanged in size from the last reopening in September.  Heading into today supply, one trader felt that “the dovish tone" of the Fed yesterday and the "increased likelihood of a near-term stop and/or pivot should attract sufficient demand for this duration, but the pace of the real yield rally in just the last two weeks could also keep investors away from the auction in hopes for a near-term retracement.”


    For their part, strategists at Barclays believe that “given yesterday’s shifts in the FOMC’s forward guidance, along with lingering uncertainty about the consequences of tightening financial and credit conditions, we expect strong demand at the offering, as the issue still offers a real yield of well over 1%, and see a higher probability of  another stop-through than a tail.” 


    Similarly, strategists at JP Morgan believe that today’s supply should be relatively easy to take down and they highlight the following:


      ”…10-year real yields have roundtripped, rising as much as 42bp through the beginning of this month before more than retracing the move over the last two weeks and are now modestly below the last auction stop.  Meanwhile, breakevens have also traversed a 40bp range and are now trading 11bp wider since the last auction.  Despite the richening in TIPS over recent sessions, breakevens still appear somewhat cheap on a cross-market basis, after adjusting for commodities prices and risk assets, and real yields also flag as somewhat too high versus fundamentals.


      “….  Additionally, there are number of fundamental tailwinds that should support the product into tomorrow’s supply process.  First, even as recent economic data have been strong, with core CPI rising 0.5% m/m in February, Chair Powell delivered a dovish hike today, signaling the end of the tightening cycle is near.  Second, it appears that concerns over banking sector stability could be subsiding.  Chair Powell noted that deposits in the banking system have stabilized over the past week and also stated that ‘depositors should assume their deposits are safe.’   Treasury Secretary Yellen delivered a similar message in her Congressional testimony today.


      “…Overall, given cheap valuations and the reduction in Fed tightening expectations alongside still elevated inflation, we think tomorrow’s auction will be digested relatively smoothly.”


    2s +0.875bps (-0.625bps), 3s -10.5bps (+1bps), 5s -19.75bps (+0.375bps), 7s -28bps (+0.375bps), 10s -27.25bps (-0.875bps), 20s -66bps (-0.375bps), 30s -73bps (-1bps).


    New issues

    • UnitedHealth is working on a 4-part 5y, 10y, 30y and 40y benchmark via Citi, DB, GS, MS, PNC, RBC, TSI and WFS.  A3/A+/A.  Price talk: +115bps area, +145bps area, +175bps area, +190bps area.


    • Prologis is working on a 10y and 30y benchmark via BofA, PNC, Scotia and WFS.  A3/A.  Price talk: +170bps area, +190bps area.


    • Medtronic is working on a 5y and 10y benchmark via Barclays, JPM and MIZ.  A3/A.  Price talk: +120bps area, +145bps area.


    • Nutrien is working on a 5y and 30y benchmark via BMO, BNS, Citi and MS.  Baa2/BBB.  Price talk: +180-185bps area, +245-250bps area.


    • Public Service Electric & Gas is working on a 10y and 30y benchmark via BofA, MUFG, RBC and USB.  A1/A.  Price talk: +155-160bps area, +175-180bps area.


    • Marriot International is working on a 6y benchmark via DB, JPM, TD and TSI.  Baa2/BBB.  Price talk: +205bps area.


    • AIG is working on a 10y benchmark via BofA, JPM and MS.  Baa2/BBB+/BBB+.  Price talk: +210bps area.


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