USD Swaps: Curve, spreads flatter as red SOFRs slide
Steeper in narrow ranges
Treasuries are lower again in early trading and the curve is flatter with the 2y at 4.13% (+5bps) having swung in a 4.00% to 4.13% range, while the 10y is 3.60% (+3bps). Data today is limited to Pending Home Sales, allowing the market to focus on another appearance by Fed Vice Chair for Supervision Michael Barr and the $35bn 7y auction. Risk assets are mostly stronger with Deutsche Bank shares +2% and S&P futures +0.8%, although FRC is 4% lower. WTI is 90 cents stronger and TIPS breakevens are 2-3bps wider beyond the very front end.
In swaps, the spread curve is flatter with 2s at 1.75bps (+0.75), 5s at -23.50bps (+0.25), 10s at -30.75bps (-0.50) and 30s at -76.75 bps (-0.50). Outright SOFR swap flows are below-par at the front end but stronger in the 7y and 30y buckets. Shorter in, SOFR futures are 2-9 ticks lower in the back whites and reds.
Ahead, strategists at BNP Paribas survey the carnage of the last few weeks – and more recent steps towards normality – and reaffirm their support for near term steepeners:
- “The Fed seems to be in calibration mode, stuck between inflation and a potential recession. Although Powell said he does not see rate cuts in 2023, he still sees a lot of uncertainty over how recent banking disruptions could tighten lending standards and slowdown the economy. Depending on how problematic these bank funding concerns become, we think this could either bull or bear steepen the curve.
“On one side, regional banks may tighten lending standards and could induce a significant slowdown on the economy which would make sense for the Fed to pause at the May meeting. On the other side, this could be seen as a premature pause if financial conditions do not tighten sufficiently and cause inflation to reaccelerate and place an inflation premium on the long-end of the curve. Regardless we continue to see a steeper curve in the near-term.
Callables and Formosas: Natixis AUD Formosa
- Natixis sold an AUD32m 15y NC5 callable fixed Formosa due Apr 2038. The EMTN matures Apr 2038, is callable annually from Apr 2028 and pays a 6% coupon. Lead is E.Sun and announced Mar 28.
- Dutch development bank FMO (AAA) plans a $500m 2y at around swaps +27bps through BofA, Daiwa, HSBC and JPM.
- LABL Inc. yesterday priced a $300m 5.5y NC2.5 secured high yield deal at 9.5% via GS, BofA, Barclays, WFS, DB, RBC, UBS, HSBC, BNPP, MUFG, BMO, MIZ, Truist, USB, Citi and CS.
- Hyundai Capital America yesterday priced a $2.5bn 3-part ($1.2bn 3y, $800m 5y and $500m 7y). Leads are Barclays (B&D), CA, JPM, MUF, RBC and TD. +175bps, +200bps, +225bps.