USD Swaps: Fed's Barr placates; USTs bear flattening as angst eases; 5y up

Bond chart table 30 Jan 2023
USTs are bear flattening as angst eases and Fed Chair Barr placates the Senate Banking Committee. JPM previews 5y auction.

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  • Fed’s Barr placates; USTs bear flattening as angst eases; 5y up

  • New Issues


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    Fed’s Barr placates; USTs bear flattening as angst eases; 5y up

    Fed Chair Michael Barr is currently in the hot seat doing his best to convince the Senate Banking Committee that all is indeed well on the banking front after the recent (ongoing?) turmoil.  And against this backdrop, the major domestic equity indices seem to be treading water for the time being (Dow +0.07%, S&P -0.34%, Nasdaq -0.82%), awaiting any potential tape bombs to drop.


    Meanwhile, Treasuries remain in bear-flattening mode as some of the recent financial/banking angst continues to get wrung out of the market amid some better-than-expected data in the backdrop (e.g. consumer confidence 104.2 versus 101 Bloomberg consensus, Richmond Fed -5 versus -10 Bloomberg consensus). The benchmark 2y note is another 6.5bps higher in yield at 4.03% while the 2s10s spread has compressed another 1.5bps to -48.5bps. 


    SOFR futures are 4 to 10 ticks softer in the reds and greens while front month IMM FRA-OIS 3.8bps narrower at 35.5bps after hitting a recent crisis high of 59.8bps roughly two weeks ago.  Meanwhile, swaps spreads are mixed amid mostly above-average flows, with IG issuance continuing to come at a healthy clip in the backdrop (see below).


    Ahead, Treasury will auction $43bn 5-year notes, unchanged in size from last month, after yesterday’s $42bn 2y note auction received a lukewarm reception (see Total Derivatives).  Heading into the auction, strategists at JP Morgan believe that a further concession may be needed but are mindful that the auction may be seen as a liquidity event.  The bank highlights the following points:


      ”… The February 5-year auction cleared at 4.109%, 0.1bp cheap to pre-auction levels as the share awarded to end-users ticked down slightly to 89.0% and the bid-to-cover ratio decreased from 2.64 to 2.48. More granularly, investment manager demand nudged up to 71.6%, the second highest on record, while the foreign investor takedown declined to 15.2%.


      “…Five-year yields have declined 54bp since the February auction. Treasuries have run ahead of their fundamental drivers and still appear somewhat rich relative to the market’s Fed and inflation expectations as well as our medium-term growth forecasts.  Furthermore, along the curve the 5-year sector looks slightly rich on the fly after adjusting for the level of rates and the shape of the curve. . Finally, the WI roll opened at -2.25bp, rich to our fair value estimate, and continues to trade near that level.


      “…We see risks beginning to skew to higher yields, with markets discounting a strong dovish response even as we are seeing nascent signs of stability in the banking sector alongside inflation still running high, and this combined with low risk sentiment amid high volatility could reduce end-user demand. That being said, we are cognizant that with liquidity at historically anemic levels, end-users could use tomorrow’s supply as a liquidity event.


      “..Thus on net with valuations looking rich, we would expect that tomorrow’s auction will require further concession to be digested smoothly, but we are aware that the results could easily be swayed by any liquidity-driven flows.”


    Currently, SOFR swaps – 2s 1.5bps (-2bps)*, 3s -14bps (-0.875bps), 5s -23.5bps (-0.75bps), 7s -31.25bps (-0.625bps), 10s -29.875bps (-0.125bps), 20s -68.625bps (+0.375bps), 30s -76.25bps (-0.5bps).

    *adjusted for the 4bp roll.  


    New issues

    • Southwestern Electric Power is working on a $350m 10y deal via GS, SMBC and WFS.  Baa2/A-/BBB+.  Price talk: +205bps area.


    • Redford Industrial is working on a $300m 5y deal via JPM, PNC and WFC.  Baa2/BBB+/BBB+.  Price talk: +185bps area.


    • Virginia Electric & Power is working on a 10y and 30y benchmark via Barclays, MIZ, MUFG, Scotia, SMBC and TD.  A2/BBB+/A-.  Price talk: +175-180bps area, +200-205bps area.


    • Pennsylvania Electric is working on a $300m 3y deal via Barclays, MUFG and USB.  Baa1/BBB/BBB+.  Price talk: +180bps area.


    • Pacific Life GF II is working on a 5y FA-backed deal via Citi, GS, JPM and MIZ.  Aa3/AA-/AA-.  Price talk: +150bps area.


    • Metropolitan Edison Co. is working on a $425m 5y deal via Barclays, MUFG and USB.  A3/BBB/BBB+.  Price talk: +200bps area.


    • Pacific Gas & Electric is working on a 30y sustainability FMB benchmark via BofA, BMO, BNPP and WFS.  Baa3/BBB-/BBB.  Price talk: +325bps area.


    • LABL Inc. is working on a $300m 5.5NC2.5 deal via GS, BofA, Barclays, WFS, DB, RBC, UBS, HSBC, BNPP, MUFG, BMO, MIZ, Truist, USB, Citi and CS.  Pricing tomorrow.


    • 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. 


    • 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.


    • Poland (A2/A-) launched a $2.5bn 10y and $2.5bn 30y bonds at Treasuries +140 and 180bps. Leads are BNPP, Citi (B&D), GS and JPM.