USD Swaps: PCE opens lane for month-end UST demand; Follow the money – Update

Steep curve 9 Nov 2020
A softer than expected core PCE has opened the lane for month-end UST demand as the market bull-flattens. BofA updates money flow analysis.

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  • PCE opens lane for month-end UST demand; Follow the money – Update


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    PCE opens lane for month-end UST demand; Follow the money – Update

    This morning’s core PCE index – the Fed’s favorite toy in the playpen – came in at a slightly lower than expected 4.6% YoY (versus 4.7% Bloomberg consensus) while all other PCE metrics came either squarely as expected or also slightly lower than expected.  However, this welcomed news did not stop Boston Fed President Collins from stating afterwards that while the data was “a bit lower” than previous/expectations, it was “not a lot a progress” on the inflation front. 


    Nevertheless, with so little good news on inflation of late, this data was just enough – along with headlines free of negative banking news - to keep the major domestic equity indices grinding higher for the third consecutive session today (Dow +0.83%, S&P +0.87%, Nasdaq +1.21%).  Similarly, these same conditions have cleared the lane for month-end flows to filter unhindered into the Treasury market today, where the market is bull-flattening in the mid-afternoon trade.


    The benchmark 10y note yield is last 4.8bps lower at 3.814% while the 2s10s spread is 1bps narrower -58.75bps.  Similarly, most SOFR futures have come along for the ride today, with the reds and greens currently seen 1.5 to 4 ticks higher in the screens.  Meanwhile, swaps spreads have widened across the board against today’s drop in underlying yields with SOFR volumes running well below average in all tenors today.  In the backdrop, IG issuance is offline today after roughly $24bn (ex. SSA) priced this week (…compared to the $15bn-$20bn initially expected).


    Elsewhere, after the recent financial/banking butchery over the past few weeks, strategists at BofA recently took a look at how money is moving around the US financial system and what this implies for bank stress (see Total Derivatives).  Today BofA updated its real-time assessment of how funds are flowing in the system using daily & weekly data across JFLBs, MMF, and the Fed:


      ”…Key takeaway: banking system stress remains high, but there are some signs of stabilization / tentative improvement. A decline in FHLB issuance may be a signal of slowing advance demand. A reduction in FHLB debt as well as typical quarter end dynamics are likely driving the increase in ON RRP take-up as MMFs shift holdings.


      “…FHLB activity: FHLB debt issuance is the best barometer for bank advance / loan demand. Daily FHLB debt issuance data is from the BofA Securities trading desk. Trading desk data is the best real time data we are aware of; FHLB official numbers are monthly.


      FHLB net issuance on Thursday, March 30th was $3.4b after declining $11b the prior day, which shows a significant slowdown from $156b at the start of bank stress. This decline likely signals a slowdown in bank demand for FHLB advances. Since March 10th, FHLBs have net issued $297b according to BofA Securities data.


      “…Money market funds: MMF flows can represent cash moving around the system or cash leaving commercial banks. To track deposit outflows, we think the relevant statistic to watch is increase in Fed ON RRP or the Treasury cash balance.


      MMF experienced inflows of $42b on Tuesday, followed by $16b of outflows on Wednesday, according to Crane data. This brings the two-week average to $20b in inflows per day. In total, MMFs are up $294b since March 10th. As FHLB debt declines, MMFs will likely continue to shift into ON RRP, which represents cash leaving the banking system.


      “…ON RRP: take-up increased $7b on Thursday, a slowdown from the $33b increase on Wednesday. Total use remains $77bn above March 10th levels. We expect ON RRP take-up to continue to increase into quarter-end given typical quarter-end dynamics.


      “…Fed bank data: Fed H.4.1 data from March 29th shows $34bn w/w bank reserve increase likely from banks borrowing from the Fed, MMFs cutting ON RRP take-up, and payments from the TGA/Treasury paydowns. Fed H.4.1 also shows a reduction in borrowing from Fed liquidity programs (DW, BTFP; FIMA repo, CB swap lines).”


    Currently, SOFR swaps – 2s 3.25bps (+1bps), 3s -11.375bps (+0.5bps), 5s -22.875bps (+0.375bps), 7s -30.25bps (+0.125bps), 10s -28.75bps (+0.5bps), 20s -66bps (+0.75bps), 30s -72.5bps (+1.125bps).