USD Swaps: Mixed messaging ahead of NFP; Vacillation

Chart 24 Nov 2021
USTs digested some hawkish talk from Fed speak while other, such as JPM's Dimon, sounded the recessionary alarm bells. Swaps widened in low volumes.

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  • Mixed messaging ahead of NFP; Vacillation 

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    Mixed messaging ahead of NFP; Vacillation

    Ahead of NFP tomorrow, Treasuries were confined into a tight vacillating range, with the front end giving back modest gains to end lower on the day while the belly and longer end stayed a bit higher on the day. The 10y note yield is last 0.4bps lower at 3.305%while the 2y sits at 3.833% (4.1bps higher in yield). 2s10s is thus 4.5bps flatter at -53bps while 5s30s is last 2.6bps lower at 17.3bps. Equities made up earlier losses to end in positive territory (DJIA +0.01%, S&P +0.35% and Nasdaq +0.76%).


    Swap spreads widened out amid mixed volumes. IG new issuance is likely done for the week and closed out with an underwhelming $9bn priced  (ex-SSA), well under the $15bn expected.


    Before NFP, mixed messaging was the main theme of the day. On one hand, St Louis Fed President Bullard sounded hawkish in earlier comments saying that financial stress seemed “abated” and so “it is a good moment to continue to fight inflation.” Bullard was also quoted in a WSJ article today by Fed whisperer Nick Timiraos saying that he sees “an 80% chance that the economy isn’t seriously derailed by banking-system stress, in which case he thinks the Fed will need to increase rates a few more times.” Bullard also offered “Or this could get worse, and all bets are off."


    Meanwhile JP Morgan CEO Dimon was again sounding the alarm bells of a weaker economy saying that the recent banking crisis was “recessionary” after saying earlier in the week in his letter to shareholders that the economy may be headed from a “virtuous” to a “vicious” cycle and while warning of “repercussions…for years to come,” from the recent banking crisis.


    Looking at the front end of the curve, one trader reflected upon the sharp shift in economic data in the past month – at the beginning of March “it was all strong data – in labor, inflation” and then the banking crisis happened “and literally after that all the data have come in lower than surveys and point to a cooling down and a weakening in the economy.”


    However, the source regarded that “whether this means that the Fed needs to cut rates doesn’t seem justifiable” and the pricing of easing in the front end “seems too much but it keeps on going on, from 70-80-90-100bps…” 


    For their part, analysts at BofA believe “US payrolls matter since the Fed has been arguing that for the inflation target to move within reach, the imbalances in the labor market need to be resolved” but BofA argues that “anything other than a very rapid deterioration risks challenging the cuts currently priced into the OIS curve.”


    2s +4bps (+1.375bps), 3s -12bps (+0.75bps), 5s -22.125bps (+0.375bps), 7s -29bps (+1.125bps), 10s -28.625bps (+0.125bps), 20s -63bps (+0.125bps), 30s -68.75bps (+0.625bps).



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