USD Swaps: Belly leads selloff; Investors neutral duration, banks mull longs

Chart numbers 14 Jun 2022
The belly of the UST curve is leading the selloff today with WTI futures holding Monday's gains. Ahead, banks see the Fed peak as a signal for longs.

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  • Belly leads selloff

  • Investors neutral but should look at 10s/30s steepeners: JPM

  • New issues


    Belly leads selloff

    European fixed income is underperforming today (see Total Derivatives) and the belly is leading the selloff in the UST curve with 10y yields having edged up to 3.46% (+5bps) while 10s/30s is around a bp flatter ahead of the JOLTS (consensus is 10500K vs 10824K) data and factory orders (consensus is -0.5%), followed later by a trio of Fed speakers beginning with Governor Lisa Cook.


    In swaps, volumes are below average ahead of the long weekend and spreads are mostly unchanged or a touch wider with only a handful of swapped deals on the screen. Two-year spreads are 3.75bps (unch), 5s at -23.00bps (+0.25), 10s at -29.75bps (unch) and 30s at -71.00bps (unch).


    Finally in risk assets, oil prices are holding yesterday’s OPEC-driven gains with WTI at $81.35 (+0.93) while S&P futures are +0.3%.  


     Investors neutral but should look at 10s/30s steepeners: JPM

    JP Morgan’s latest Treasury client survey, published today, shows unchanged investor positioning in the week to April 3 with the ‘All clients’ net balance steady at a mildly long +2% (above the -8% average balance over the last five years) and the ‘Active clients’ stable at a slightly bearish -11% (close to the -8% five-year average). The share of ‘neutral’ investors in the survey remained high, at 76% and 67%, respectively.


    Still, strategists at JP Morgan are starting to eye long duration positions as they see the end of the Fed’s rate hike cycle coming into sight. The bank explains:   


      “Tightening credit conditions (will) lead to weaker growth later this year. Given our expectations the Fed will be done tightening in May, the prospects for adding duration are becoming more attractive, particularly as investor risk appetite remains low.”


    The bank’s economists reckon that headwinds to credit growth following turmoil in the banking sector could subtract as much as 0.5-1.0% from US GDP in coming quarters,  broadly consistent JPM’s forecast of “a Fed-induced recession much later this year."


    Hence, they expect only one more 25bps hike at the May FOMC meeting before the Fed goes on hold. They continue: "It stands to reason that we should be more comfortable adding duration, particularly given that yields tend to peak in the  months leading up to the final hike". JPM estimates that: 


      “Valuations appear somewhat rich (around 25bps in 10y) and we prefer to wait for higher yields to add duration.”


      “Treasury curves have become more sensitive to moves in front-end yields and we think steepeners are more attractive than duration longs, particularly given their carry profile…Continue to favor 10s/30s, though acknowledge more steepening may be limited near term if markets move to price a May hike.”


      “Importantly, we now see more limited room for front-end yields to reprice higher in the near term, as the forward OIS market is pricing 11bp in additional tightening and only 63bp of easing through year-end, down from more than 100bp just 2 weeks ago. Against this backdrop, we feel comfortable with the increased counter-directionality of 10s/30s to the level of 2-year yields.”


    New issues

    • KfW plans a $3bn 3y Global at swaps +20bps. Leads are DB, HSBC and JPM.


    • World Bank is working on a USD long 5y Sustainability Global at swaps +37bps. Leads are Citi, RBC, TD and WFS.    


    • IADB plans a USD 10y Sustainability Global at swaps +53bps. Leads are BMO, BofA, DB and MS.


    • Jordan is preparing a USD long 5y at around 8.125%. Leads are Citi, GS and HSBC (B&D).


    • REC yesterday priced a $750m 5y Green 5.625%. Leads are Barclays, DBS, MUFG, StanChart and State Bank of India.  Baa3/BBB-. +212.5bps.


    • Saudi Electricity (A1/A) yesterday priced a $1.2bn 10y Green at Treasuries +120bps and a $800m 30y at +205bps. Leads are FADB, HSBC, JPM, Mizuho, MUFG, SMBC Nikko, SNB and StanChart (B&D).