USD Swaps: Minor bear flattening into CPI; Conviction wariness

Bond chart 30 Jan 2023
USTs bear flattened modestly ahead of CPI. Sources warn against having too much conviction as dramatic thematic macro shifts abound.

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  • Minor bear flattening into CPI; Conviction wariness

  • New issues


    Minor bear flattening into CPI; Conviction wariness  

    Treasuries have bear flattened a touch with the 2y note yield last 2.2bps higher at 4.033% while the 10y note yield is last 1.1bps higher at 3.426%, thus flattening 2s10s by 1bps to 60.8bps while 5s30s is last 2.2bps flatter at 8.6bps. Equities closed mixed (DJIA +0.29%, S&P -0.06% and Nasdaq -0.43%). In the TIPS market, the CPI NSA fixing traded at 302.225 (versus the forecast of 302.241), sources report. 


    Earlier, the $40bn 3y auction came at the bid side of the 1pm level, drawing a rate of 3.81%. Indirects dropped (61.3%) while directs rose (21%), leaving dealers with a larger allocation of 17.7%. The bid-to-cover of 2.59x was lower.


    Swap spreads mostly tightened outside of the 3y, which saw better paying into and out of the auction, but overall volumes were below average. The IG new issuance supply was limited to a Yankee FIG MUFG that priced a $2.5bn 4-part which was likely swapped.


    Going into CPI, one portfolio manager believed that one should be “wary of conviction” as the broader macro market has been shifting around a lot in terms of themes and thus, being cautious “about the confidence you have in your view” is important to survive these markets. “It is very different than last year, where the Fed dictated direction,” the source added. “Nothing is set in stone,” and the impact of tighter credit conditions has yet to be assessed, the source added, noting “the economy is decelerating, but by how much?”  


    Indeed, Fed speak today was mixed as Chicago Fed’s Goolsbee (voter) said “given how uncertainty abounds about where these financial headwinds are going, I think we need to be cautious” and we should be “careful about raising rates too aggressively until we see how much work the headwinds are doing for us in getting down inflation.”


    Meanwhile NY Fed’s Williams (voter) sounded an oft-repeated mantra of needing “to do what we need to in order to make sure we bring inflation down.” Williams said that data is “consistently strong” while the impact of the recent banking turmoil remains uncertain.  Meanwhile Treasury Secretary Yellen had not seen evidence of a contraction in credit yet, while she noted that the economy is “obviously performing exceptionally well” but that a downturn remains “a risk.”  


    2s +2.75bps (-0.5bps), 3s -11.25bps (+0.75bps), 5s -21.25bps (-0.375bps), 7s -28.625bps (-0.25bps), 10s -28.75bps (-0.5bps), 20s -63.75bps (-1.5bps), 30s -70.75bps (-0.5bps).



    New issues


    • Southern California Edison has mandated RBC, Barclays and Citi for a series of investor meetings commencing tomorrow with respect to an offering of Green Senior Secured Recovery Bonds.  


    • MUFG priced a $2.5bn 4-part ($300m 3y NC2 FRN, $500m 3y NC2, $700m 6y NC5 and $1bn 11y NC10 fixed TLAC bonds).  Leads MS and MUFG. +150bps, SPFR +144bps, +170bps and +197bps.