USD Swaps: Long end outperforms into ME; Post-mortem on USTs

Binary 7 Dec 2021
The long end outperformed in a modest flattening. Swap spreads saw the wings widen vs the belly. Barclays examines UST trading in the crisis.

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  • Long end outperforms into ME; Post-mortem on USTs

  • New issues


    Long end outperforms into ME; Post-mortem on USTs

    Treasuries are closing with very modest gains of around 2.5bps amid sideways trading in a tight range with very long end yields outperforming. The 10y note yield is last 1.3bps lower at 3.554% while 2s10s is 1.5bps flatter at -55.6bps and 5s30s 1.4bps flatter at 6.2bps. Equities closed higher (DJIA +0.43%, S&P +0.53% and Nasdaq +0.73%).


    As for Fed-speak this afternoon, Boston Fed President Collins (non-voter) said that inflation “remains too high” and that there “more work to do to bring inflation down.” She also added that “tighter lending standards” and a “more conservative outlook”  by banks “partially offset the need for additional rate increases.”


    Commenting on the recent bank turmoil, Minneapolis Fed President Kashkari said “it is going to take us a while until we fully understand, are there more losses out there: and that “this could take a little longer than we expect until we fully get behind it.” As for inflation, Kashkari (voter) said “we still have more work to do to bring the services side of the economy back into balance.”


    Elsewhere, Richmond Fed President Barkin saying he was undecided for a move in May as he could “imagine many different outcomes.”


    Swap spreads saw a tight range with the spread curve seeing the wings outperform the belly amid mixed volumes. IG new supply saw a modest haul today of $1.35bn, but with that brought the March MTD to over $100bn.  


    Elsewhere, in a post-mortem analysts at Barclays recently examined UST trading around the crisis. At the peak on March 13th, daily nominal Treasury volumes increased “to as high as $1.2trn” which was “even higher than in March 2020 during the COVID crisis, with daily volumes averaging as high as $1.0trn.”


    As for maturity, Barclays finds that trading activity has been elevated in “the 3-5y sector, where the volume share has risen to 30-35% versus 25-30% pre-SVB, while 2-3y sector volume share declined in March” and since the peak, relative activity in the 3-5y sector “remains elevated.” In on-the-runs, “2s, 5s and 10s led the bulk of activity, particularly the 5y tenor.”


    Turning to liquidity, Barclays saw “a modest increase in on-the-run bid-ask spreads but not as high as during COVID in March 2020; however, the 7y tenor does appear somewhat elevated” and while bid-ask spreads increased for off-the-runs, “they are nowhere near the levels seen during COVID, when they widened well over 2bp.”


    Meanwhile aggregate errors to the Treasury spline (RMSE) have already been elevated over the past year “given the deterioration of liquidity conditions in the Treasury market,” Barclays notes that “most of the recent increases in the spline errors have occurred at the front-end in the under 3y sector as well as the 20y sector (11-21y).”


    Lastly, looking at primary dealer inventories, the 2-3y and 11-21y saw “notable increases in March” with the latest data as of March 15, while other sectors saw “modest” increases, Barclays finds. “The pickup at the 2- 3y sector, widening in off-the-run bid ask spreads, and higher dispersion to the Treasury spline suggest potential Treasury sales,” the bank suggests.


    2s +2.5bps (+0.75bps), 3s -12.25bps (+0.625bps), 5s -23.75bps (-0.875bps), 7s -30.5bps (-0.875bps)*, 10s -29.625bps (-0.75bps), 20s -67bps (+1bps), 30s -73.75bps (+0.75bps).


    *adjusted for the 1.6bp give



    New issues



    • Northern Star (Baa3/BBB-) priced a $600m 10y. Leads BofA, HSBC and JPM. +270bps.


    • Western Midstream Operating LP priced a $750m 10y benchmark via WFS, TD and MUFG.  Baa3/BBB-/BB+.  +262.5bps.


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