USD Swaps: Herd-like trading; Regional banks pressured; Bull steepening

Herd-like trading; Regional banks pressured; Bull steepening   

Treasuries pushed higher this afternoon in a front end led move that sees yields up to 16bps lower.  The 2y note yield is last 3.802% or 15.8bps lower while the 10y is last 3.40% or 5.4bps lower.  2s10s is last 10.4bps firmer at -40.6bps while 5s30s steepened 11.7bps to 25.8bps.  

Looking at the price action in Treasuries, one trader believed that the market is exhibiting “herd mentality” with a lot of trading intraday “just piling on a move” as recent moves have been trend-friendly. “There’s been good money to be made just adding on to a move intraday,” he highlighted. That said, as yields are close to the bottom end of the range, the trader considered that some sectors are now looking rich as they reach these levels.

Earlier this afternoon, Treasury Secretary Yellen added a line to a 3pm testimony to a House panel that differed from yesterday’s text to the Senate, saying “Certainly, we would be prepared to take additional actions if warranted.”  Equities closed a touch higher on the day after relinquishing some gains made earlier in the session  (DJIA +0.23%, S&P +0.44% and Nasdaq +1.01%).

However, the banking sector remained under pressure. The KBW Index dropped 1.6%. Regional banks remained under pressure with many close to or at new lows. First Republic shares closed -5.7%, Zions fell -8.86% and PacWest shares dropped -8.55%.

Meanwhile the $15bn 10y TIPS reopening came pretty much on the screws drawing a rate of 1.182% with lower indirects (73.1%), higher directs (16%) and a 10.9% primary dealer allocation (for more please see Total Derivatives ).

Swap spreads narrowed in along with the underlying rally amid mixed volumes. On the week, the 10y spread, for example, is back down to the around -29bps or around 13bps lower from a week ago. Analysts at JP Morgan notes that swap spreads in the belly "appear to exhibit some signs of a traditional flight-to- quality widening" as 10y maturity matched swap spreads "traded with a negative correlation to yields" last week, in contrast to the previous 3 months." JP Morgan suggests that "this likely reflects flight-to-quality inflows into USTs" and "persistence (or lack thereof) of this negative correlation is likely to be a good indicator of the market's risk aversion," and thus worth monitoring.

Meanwhile, longer end spreads typically narrow on USD dollar strength, but that has not been a significant trend of late. Indeed, analysts at BNP Paribas see a USD surge (similar to 2020 or 2008) as “unlikely.”

”The USD tends to surge during periods of financial stress as investors seek safe assets and bid up dollar funding. However, despite heightened worries of financial sector contagion following the fall of SIVB , the dollar has been remarkably steady over the past month.”

BNP Paribas sees two reasons why:

”The first is the USD’s starting point, from a valuation perspective. On a real effective exchange rate basis, the USD is nearly 10% richer than at the onset of recession in 2020 and 50% more expensive than it was going into the global financial crisis. All else equal, a very expensive dollar should deter (at the margin) some safe-haven inflows compared to previous financial downturns.

 

“But second, and more important, we think USD shortage issues will be much less acute than in 2020 or in 2008. Indeed, as the dollar is the global liability currency of the world, and given the scale of USD assets held abroad that consistently need to be FX-hedged, periods of financial market stress tend to result in USD shortages, driving up the cost to borrow the currency. This is reflected in FX basis, which measures the premium to borrow dollars in the FX market, relative to what it ‘should’ cost if covered interest rate parity held.”

Elsewhere, IG new issuance recorded $13.65bn across seven issuers, led by the $6.5bn 4-part by United Healthcare. The weekly total is now a respectable $21bn. On the options side, receiver skew on 6m2y stayed rich, with the 100bp out risk reversals traded negative - thus reflecting demand for lower rate protection (for more please see Total Derivatives).

2s -1.125bps (-2.75bps), 3s -12.5bps (-1bps), 5s -20.5bps (-1.25bps), 7s -29.25bps (-1bps), 10s -29.125bps (-2.75bps), 20s -68.75bps (-3bps), 30s -74.5bps (-2.375bps).

New issues

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

   

• UnitedHealth priced a $6.5bn 4-part ($1.2bn 5y, $1.5bn 10y, $2bn 30y and $1.75bn 40y). Leads Citi, DB, GS, MS, PNC, RBC, TSI and WFS.  A3/A+/A. +88bps, +118bps, +143bps, +158bps.  

   

• Prologis priced a $1.2bn 2-part ($750m 10y and $450m 30y). Leads BofA, PNC, Scotia and WFS.  A3/A. +140bps and +160bps.

   

• Medtronic priced a $2bn 2-part ($1bn 5y and $1bn 10y). Leads Barclays, JPM and MIZ.  A3/A.  +87.5bps, +115bps.

   

• Public Service Electric & Gas priced a $900m 2-part ($500m 10y and $400m 30y). Leads BofA, MUFG, RBC and USB.  A1/A.  +122bps and +142bps.

   

• Marriot International priced a $800m 6y benchmark via DB, JPM, TD and TSI.  Baa2/BBB. +170bps.

   

• Nutrien priced a $1.5bn 2-part ($750m 5y and $750m 30y). Leads BMO, BNS, Citi and MS.  Baa2/BBB.  +150bps, +215bps.

   

• AIG priced a $750m 10y benchmark. Leads BofA, JPM and MS.  Baa2/BBB+/BBB+. +175bps.