USD Swaps: Flatter but losses trimmed; Mo money mo problems?

Down candle chart 26 May 2022
USTs are off early lows but the curve remains flatter on the back of losses at the front end. Analysts ask if more money will bring more problems.

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  • Flatter as USTs trim losses

  • Barclays: Stocks less wrong than bonds

  • Mo money mo problems?

  • Callables and Formosas: GS FRN

  • New issues


    Flatter as USTs trim losses

    The Treasury curve remains flatter despite paring losses today with the 10y yield back to 3.53% (unch) after rising by 15bps yesterday and testing 3.57% early doors. 2y yields are 3.99% (+4bps) but the 2y hit 4.05% this morning and SOFR futures are 1-6 ticks softer in the reds after losing up to 27 ticks on Monday. Hence 2s/10s is a few bps flatter after the S&P CoreLogic house price data (-0.4%mom/2.55%yoy versus 4.62%yoy last month) and before consumer confidence and the Richmond Fed index. Also today, Treasury sells $43bn in 5y notes and the Fed’s Michael Barr testifies to the Senate Banking Committee.


    Meanwhile swap spreads are narrowly mixed with 2s at 2.50bp, 5s at -23.25bps (-0.50), 10s at -29.75bps (unch) and 30s at -75.75bps (unch). Swap flows above normal across most of the curve and strongest in the 7y and 30y buckets as global IG issuance continues to pick-up in dollars and especially euros .


    Barclays: Stocks less wrong than bonds

    With bank shares mixed today (Deutsche Bank is -2.4% but its CDS are a touch tighter, UBS is +1.3% and FRC is +3.2% pre-market) while wider S&P futures are -0.2%, macro analysts at Barclays review the prospects for risk assets after recent volatility.


    First they assess the state of the financial sector, finding that there was “no visible catalyst” for the pressure on DB CDS last week and highlighting the major differences between DB and CS regarding “deposit stickiness, profitability, and funding vulnerability”.


    In addition, they judge the $60bn in dollar funding borrowed from FIMA “only precautionary” and reckon that US authorities are “implying” that depositors of banks taken into receivership will be protected. They continue:


      “There are few signs of funding market stress; overnight SOFR has returned to the rate floor. We likewise have few concerns about the domestic CP market for banks. We see tentative signs of stabilization in the US banking system, even if deposit flight persists.”


    Against this backdrop, they suggest that the front end is too optimistic about Fed easing and they remain negative about equities:  


      “The US front end rally has been too persistent to be explained away by positioning…Investors have also cut the modal fed funds rate by 100bp, to 4.5%. (However) we believe the modal outlook should be near the Fed’s 5.1% forecast, despite credit tightening. Bonds are also suddenly giving very high weight to a widespread bank crisis; stocks are not. The end result is Fed cuts starting from June, which we find extremely unlikely. A garden variety recession, absent a true financial crisis, is not going to spark quick Fed easing”


      “Fair value on US equities is 10-15% lower than current levels. But broader stock markets have been very resilient so far, helped by lower rates…With central bank meetings out of the way, we don’t see a catalyst for de-risking next week. At this point, the equity market is ‘less wrong’ in our view than US short rates”


    Mo money mo problems?

    Elsewhere, a different set of (bank) analysts at Barclays look at the impact on the top 6 US banks of inflows of flight deposits. They conclude that it’s “unlikely” they will need to issue debt solely to support new RWAs funded with deposits gained from the regional banks. Barclays explains:


      “Although the Big 6 would benefit from deposit acquisitions operationally, large volumes of deposit inflows would inflate their balance sheets, and thus affect capital and leverage ratios.”


      “The Big 6 banks have the capacity to absorb a large potential inflow of deposits - up to 25% of the uninsured deposits at regionals (very unlikely possibility) - without needing to raise debt or capital to meet minimum regulatory requirements…JPM and BAC’s regulatory ratios are the most affected in our most severe deposit inflow scenario.”


      “CET1 capital ratios remain the binding constraint of the Big 6…Existing TLAC/LTD buffers have ample capacity to accommodate a significant influx of deposits. This is important because it makes it unlikely that they will need to issue senior debt solely to support new RWAs…Prior to the failure of SIVB, Big 6 issuance had already underwhelmed…SLR buffers across the Big 6 banks are resilient across all of our scenarios.”


    Callables and Formosas: GS FRN

    • Goldman Sachs sold a $152m floating rate Formosa due Apr 2028 paying SOFR +132bps floored at 0%. The EMTN was led by Mega, Sinopac and Taishin. Announced Mar 27. 


    New issues

    • Lowe's (Baa1/BBB+) is preparing USD 3y, 10y, 30y and 40y bonds at around Treasuries +130, 187.5, 230 and 245bps. Leads are BofA, Citi, JPM and Mizuho. 


    • Poland (A2/A-) plans USD  long 10y and 30y bonds at around Treasuries +170 and 210bps. Leads are BNPP, Citi (B&D), GS and JPM.


    • Hyundai Capital America is preparing USD 3y, 3y FRN, 5y and 7y bonds in the region of Treasuries +210bps, SOFR equivalent, +230bps and +255bps. Leads are Barclays (B&D), CA, JPM, MUF, RBC and TD.


    • Hong Kong insurer AIA Group plans a USD 10y at around Treasuries +180bps. Leads are BNPP, CA, DB, MS (B&D), StanChart and WFS.


    • Bank Mandiri is preparing a $300m 3y at Treasuries +183bps via Citi, HSBC (B&D), JPM, Mandiri, MUFG and StanChart.