USDi: Softer data weighs on BEs once again

Crushed man 7 Dec 2021
Weaker than expected data once again served as the death knell for the U.S. inflation market today with BEs bear steepening once again.

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  • Softer data weighs on BEs once again

  • BofA: Real yields at back-end remain attractive

  • Inflation-linked structures


    Click here for SDR inflation swap trade


    Softer data weighs on BEs once again

    After sellers seized on the OPEC-induced pop in oil prices yesterday after the ISM data portended some rough riding ahead for the economy, weaker than expected data once again served as the death knell for the U.S. inflation market today. 


    To be sure, a larger-than-expected dip in JOLTS job opening (9.931m versus 10.5m Bloomberg consensus, 10.563m revised prior) and softer-than-expected factory orders data (-0.3% MoM versus 0% consensus) lit a bull-steepening match under nominals this morning after a softer opening. 


    And with energy prices taking a hit off their early session highs to close out mixed (gasoline (-0.68%, Brent -0.13%, WTI +0.11%), it was another day of tough sledding for TIPS breakevens and inflation swaps which once again bear steepened aggressively this session.  And while the inflation curves managed to push off their late morning lows, dealers are still marking them another ~2 to 12bps lower in the 2y-30y sector today.


    Inflationistas highlighted the recent bullish run-up for some of the recent weakness over the past two sessions.  “The consistent outperformance seen last week also played a role as end-users likely felt much more comfortable lightening up after the rebound off of the panic lows on March 17th,” one dealer explained.


    In derivatives-space, inflation swap on the SDR today included 1y ZC swaps at 273bps and 269bps, 2y ZC swaps at 260.375bps, 259bps, 246.5bps and 251bps, 3y ZC swaps at 257.75bps, 5y ZC swaps at 257.125bps, and 249.25bps, 10y ZC swap at 256bps, 254.625bps, 250.5bps and 250.125bps, and 30y ZC swaps at 235.5bps, 235.125bps, and 235.375bps (for all of today’s trades, see Total Derivatives SDR, which now also includes information on broker/platform).


    Heading into the final hour of trade, the 2y breakeven in trading in the screens at 261.25bps (-11.5bps), 5y at 239.875bps (-6.75bps), 10y at 225.875bps (-3.875bps) and 30y at 219.25bps (-2bps).



    BofA: Real yields at back-end remain attractive

    Ahead of the unexpected banking sector risk events, strategists at BofA recommended “positioning for a flatter real yield curve on the view that either longer-dated real yields were correct in pricing of R* well above the SEP and the Fed had further to hike or the Fed was close to ending its hiking cycle and R* is likely lower.”  And the bank now finds that “the latter seems to be true,” which supports its view that “longer-dated real yields are a buy, one of our highest conviction macro trades for the 2023 year ahead.”  BofA expounds below:


      ”…With the Fed expecting to end its hiking cycle with a real overnight policy rate of 150bps (5.1% '23 fed funds rate less 3.3% PCE inflation rate less 30bps CPI/ PCE wedge), we think this argues for a much lower real policy rate over the longer term. 30y real yields currently around 145bps, right around the Fed's "restrictive" real policy rate, remains an attractive long position in our view.


      “…We recommend going long 30y TIPS (on Nov 20 at 1.60%, current 1.45%) targeting 1.00% with a stop of 1.90%. Risks to the trade are a backup in longer-dated duration demand and expectations for a more restrictive Fed. However, we think that 30y TIPS remain at attractive levels and will eventually rally on the turn in the cycle we expect later this year.”



    Inflation-linked structures

    • UBS is working on a self-led inflation-linked note maturing Apr 2025 that pays CPI*spread between 1.55-1.85 for the first year, floored at zero, and then pays 4%. Eurodollar.