USD Swaps: Banks, S&P up again; BofA's rate views

USTs off highs as banks, S&P rise again 

USTs are off early highs with the 10y at 3.56% (unch) as risk assets modestly extend their rally, with S&P futures +0.5% and European bank stocks 1.5% to 3.5% firmer. Similarly Deutsche Bank CDS are 15bps tighter at 164bps, after testing 210bps last week. Regulators at the European Securities and Markets Authority said today that they were looking at the illiquid single name CDS market after recent volatility. 

The Fed’s Barkin, Collins and Kashkari are due to speak today and red SOFRs are 1-2 ticks firmer, with revised GDP and initial claims data up next (consensus is for a 4K rise in claims to 195K) . In the news, the WSJ previews Janet Yellen’s upcoming speech in which the Treasury Secretary is expected to warn that bank regulation may need to be tightened in the wake of events at SVB and Signature Bank. She will add that money market and hedge funds also pose risks to financial stability and were being looked at by regulators.  

Swap spreads are flatter again with 2s at 2.50bps (+1.00), 5s at -23.50bps (-0.50), 10s at -29.50bps (-0.50) and 30s at -74.75bps (-0.25). Swap volumes are mostly below average except in the 30y bucket.

BofA: A lower path and less inversion – but very data-dependent

BofA has updated its rates forecasts in the wake of recent bank turmoil and Fed comments. It concludes that “extreme" data dependence is back with the result that future jobs or inflation numbers could “materially" change Fed pricing and term interest rate levels. With this major caveat in mind, the bank sets out its current views on 10y, 2y and the curve:

“We hold our year-end 10y forecast unchanged at 3.25% but lower the 10y path along the way…(There is) downside risk to our forecasts if the credit cycle turns, but if data proves resilient and banking concerns subside, the market may unwind some of the recent rally and focus back on the re-acceleration risks that were arising just before the confidence crunch started in the banking sector.”

At the front end of the Treasury curve, after revising its previous forecasts lower BofA now sees the 2y UST at around 3.5% at end-2023 and 2.75% at end-2024. However, it sketches some plausible outcomes around its central view:

”A scenario where the Fed stays on hold in the 4.75-5% range, delivers the first cut by mid-2023, and converges to a neutral view in the 2.75-3% range by 4Q24 implies 2yT yields c3.8-3.85%"

 

“A further rally beyond levels c.3.8-3.85% would require higher probabilities of deeper rate cuts. If the market starts to price rate cuts in May and declining to around 2.75-3% by 1Q24, 2yT yields could reach c.3.25-3.3%.”

 

“If the market immediately priced our economics team's scenario, which is one hike in May, remain on hold through 1Q24, then cut 25bps per meeting down to 2.6%, we estimate 2y would price around 4.75%. In a variation where the market prices one hike for each of May, June, July, then cut once per meeting after 1Q24, we estimate 2y may reprice to c.5.1%.”

What do the bank’s revised forecasts imply for the curve?

“Our new rate forecasts reflect a lower path for 2s and 10s along with a less inverted curve. We now expect only 25bps of inversion in 2s/10s by end-2023, in line with our US economist's call for a recession in 2H23 and rate cuts in early 2024. We expect a steeper 2s/10s curve by end-2024; the market will likely expect the Fed to adopt an accommodative policy stance for growth prospects to improve by late-2024.”

 

“We see rate cut pricing as extreme against a backdrop of still resilient US economic data. We therefore prefer to express any steepening expression in 5s/30s vs 2s/10s. A 5s30s curve steepener is less sensitive to the exact time of rate cuts vs 2s/10s. It may also benefit from a greater possibility of inflation risk premium build-up if the Fed is seen as prematurely pausing.”

New issues

• Dutch development bank FMO (AAA) plans a $500m 2y at swaps +24bps through BofA, Daiwa, HSBC and JPM.

   

• Northern Star (Baa3/BBB-) is preparing a USD 10y at around Treasuries +300bps through BofA, HSBC and JPM.

   

• Al Rajhi Sukuk has priced a $1bn 5y 4.75% Sustainability Sukuk. Leads are RJHI, Citi, Enbr, GS, HSBC, JPM (B&D), KCIC, Standard Chartered. A1/A-. +110bps.