USD Swaps: USTs rally tempers; Swap spread curve steepens

Stock graph
The knee-jerk bull steepening of morning faded to leave UST yields 2-3bps lower in roughly parallel across the curve. Swap spreads steepened.

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  • USTs rally tempers; Swap spread curve steepens  

  • New issues


    USTs rally tempers; Swap spread curve steepens   

    Treasuries ebbed lower this afternoon, erasing the bulk of the gains seen earlier today. The 2y note yield is last 2.9bps lower at 3.792% after this morning’s brief stab down through 3.65%. The 10y note yield is last 3.303% or 3.6bps lower – with 2s10s back close to unchanged after steepening nearly 10bps earlier. Equities are ending mixed (DJIA +0.24%, S&P -0.25% and Nasdaq -1.07%).


    Looking at the market reaction to the string of weaker data that has appeared this week, one trader noted that the “data tape bombs” seem to point to positioning flushes as the market has quickly rallied in the front end, suggesting that some are short the front end. That said, the source noted that UST trading by all accounts has been “orderly” – thus not suggested a big squeeze. Anyway, he suggested that the economic data direction will be settled soon enough, with CPI next week.


    Swap spreads saw the long end of the spread curve outperform, in a move that has been generally following the weakening of the USD. Overall  volumes have been higher than average with the 5y sector seeing the most flows. IG new issuance (ex-SSA) saw two issuers come for a total of $2.5bn (Micron and Realty Income) while Quebec came with a large $3.5bn 5y that was likely swapped.  


    As for views on spreads from here, despite the recent widening in 2y spreads, analysts at JP Morgan see “more room to run” and thus it continues to favor spread wideners in the front end.


    “In addition to valuations (which remain narrow to fair value), one key support for this view is the continuing inflows into RRP via money market funds,” JP Morgan assesses. Moreover, the bank’s Treasury strategists note that T-bill net issuance “tends to turn negative in April driven by tax receipts, which could pressure RRP balances higher still” as “increased RRP balances are empirically associated with downward pressure on repo rates and a widening bias on front end spreads.”


    The bank view the chief risk “is policy rate cuts (or expectations of such rate cuts)”but it finds “this is easily hedged with a small long at the front end (using a ~7% beta at current rate levels).”


    In longer maturities, JP Morgan views “the recent narrowing has provided attractive entry levels to initiate widening exposure” and it sees the classic bond contract invoice spread “has been well correlated to yield levels, and now look too narrow adjusted for yields.”


    Moreover, JP Morgan suggests “some evidence that the magnitude of the beta is likely to be stronger in a rally (over 20%), and weaker (a little over 10%) in a selloff.” Therefore, it recommends US invoice spread wideners “hedged with a 10% short, to position for a reversion to fair value and/or a widening on the back of lower yields, while hedging the risk of spread narrowing if rates rise.” For other views on spreads, please see Total Derivatives.


    2s +2.25bps (-0.125bps), 3s -12.625bps (+0.25bps), 5s -22.375bps (+0.625bps), 7s -30bps (+1bps), 10s -28.5bps (+1.25bps), 20s -63.5bps (+1.5bps), 30s -69.5bps (+1.375bps).



    New issues


    • Bahrain (B+) plans USD a long 7y Sukuk and a 12y bond after investor calls starting Apr 5. Through ABC, Citi, FAB, HSBC, JPM, NBB and StanChart. 


    • Micron priced a $1.5bn 2-part ($600m 5y and $900m 10y). Leads BNPP, JPM, MIZ, MUFG and WFS.  Baa3/BBB-/BBB.  +205bps, +265bps.


    • Realty Income priced a $1bn 2-part ($400m long 5y and $600m 10y). Leads BNPP, Barclays, GS, TD and WFS.  A3/A-. +155bps and +185bps.


    • Brazil priced a $2.25bn 10y benchmark via BNPP, BofA and MS.  Ba2/BB-/BB-. 6.15%.


    • Quebec priced a $3.5bn 5y Global via BofA, CIBC (B&D), JPM, RBC and TD at swaps +56bps. Aa2/AA-/AA-.


    • Turkey priced a $2.5bn long 7y Green at 9.3% through BofA, ING, JPM (B&D) and StanChart.