USD Swaps: USTs push higher despite Bullard; Dissecting 10s/30s curve steepeners

Chart green 14 Jun 2022
USTs are inching higher despite earlier hawkish comments by Fed’s Bullard. JP Morgan dissects its favored 10s30s UST curve steepener.

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  • USTs push higher despite Bullard; Dissecting 10s/30s curve steepeners

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    USTs push higher despite Bullard; Dissecting 10s/30s curve steepeners

    This morning’s nascent bull-steepening in USTs has morphed into a bull-flattener despite more softer-than-expected data (i.e. jobless claims +228k versus +200K Bloomberg consensus…plus +48k in prior revisions). Earlier hawkish comments from St. Louis Fed’s Bullard that “we need to stay at it to get inflation back down to 2%” and that “inflation is going to be sticky going forward” are likely greasing the wheels for some of today’s curve flattening.


    The benchmark 10y note is last 3.2bps lower at 3.279% while the 2s10s spread has compressed 1.7bps to -49.8bps.  In the SOFR futures trading pits, red and greens are outperforming the rest of the strip with up to 2.5 tick gains.  Meanwhile, swap spreads remains mostly wider amid below average SOFR volumes in all but the 3y and 30y tenors today.  In the backdrop, IG issuance looks to have dried up for the week ahead of the holiday with a modestly sullied risk tone likely serving as a light headwind today (Dow -0.28%, S&P -0.33%, Nasdaq -0.15%).


    As for the refundiing for next week, the Treasury announced it will auction off $40bn new 3y notes Tuesday, reopen $32bn 10y notes Wednesday and reopen $18bn 30y Thursday. 


    Elsewhere, strategists at JP Morgan revisit their medium term 10s/30s curve steepeners from end of last year, that was implemented for the following reasons:


      ”…First, this curve was near its flattest levels in three decades, suggesting asymmetric room for steepening coming into this year. Second, the long end tends to trade in a range-bound fashion going into the end of the tightening cycle only to consistently steepen once the Fed goes on hold. Third, the long end was displaying reduced directionality with front-end yields, suggesting that this trade was somewhat sheltered from a repricing higher in front-end yields. Fourth, while steepeners generally tend to have a negative carry, this was less pronounced in 10s/30s.”


    However, given the steepening of this curve over the last month, JP Morgan explores the premises of this trade below to understand whether it’s still an appropriate exposure:


      ”…Interestingly, as markets consider the end of the tightening cycle and scope for easing later this year,…the 10s/30s curve is trading in an increasingly counterdirectional fashion with 2-year yields. Indeed, as our colleagues in derivatives strategy noted last week, the percent of variation that is expected to be explained by the first implied principal component has spiked recently and correlations will likely remain higher in the weeks and months ahead. Accordingly, we must recognize that long-end steepeners have increasingly become low-beta proxies for duration longs. 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 and believe that curve steepeners are still appropriate as we near the end of the hiking cycle.


    Currently, SOFR swaps – 2s 3.5bps (+0.875bps), 3s -12.125bps (+0.75bps), 5s -22.375bps (+0.125bps), 7s -29.75bps (+0.375bps), 10s -28.875bps (-0.125bps), 20s -63bps (+0.125bps), 30s -68.625bps (+0.625bps).



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