USD Swaps: 10y tails; Minutes show concerns; USTs steepen
10y tails; Minutes show concerns; USTs steepen
The Treasury curve has steepened back out this afternoon, after the 10y auction tailed 2bps and the FOMC Minutes showed members concerned about possible credit tightening but at the same time found inflation still too high:
- “In discussing the policy outlook, participants observed that inflation remained much too high and that the labor market remained tight; as a result, they anticipated that some additional policy firming may be appropriate to attain a sufficiently restrictive policy stance to return inflation to 2 percent over time. Many participants noted that the likely effects of recent banking-sector developments on economic activity and inflation had led them to lower their assessments of the federal funds rate target range that would be sufficiently restrictive compared with assessments based solely on the recent economic data.”
“In determining the extent of future increases in the target range, participants judged that it would be appropriate to take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
The 10y note yield is last 3.426% or 0.6bps lower in yield and 2s10s is 4bps steeper at -55.8bps and 5s30s is 8bps steeper at 17.3bps. The $32bn 10y note reopening tailed 2bps compared to the 1pm bid side, drawing a rate of 3.455%. Directs were near unchanged (19.9%) while indirects rose a bit to 63%, leaving primary dealers with a slightly lower allocation of 17.1% compared to the previous month. The bid-to-cover of 2.36x was marginally higher.
Swap spreads saw the long end narrow versus the underlying steepening move amid below average volumes. As for IG new issuance, Walmart came quickly after CPI with a $5bn 5-part, bringing the weekly total to a more respectable $9.45bn.
As for the rate outlook post CPI, analysts from BNP Paribas find “while May Fed pricing has been relatively sticky, the market has added back to some of the cut pricing from mid-23 to end-24, with bull steepening of the broader UST curve.”
“A continued accumulation of signals that the economy is slowing” has BNP Paribas “leaning towards steeper curves with a bias towards lower front-end yields.” It specifically favors 6m forward 2s10s steepeners and 6m1y receiver flies. “Where there are outcomes that could see higher yields, we think that likely requires time and the accumulation of data to erode recession concerns and/or undermine the softening inflation narrative (i.e. higher yields are likely a lower vol outcome),” BNP Paribas suggests. On the other hand, the bank believes lower yields “can occur in much sharper fashion, with earlier and deeper cut pricing the clearest mechanism for rallies from here.”
2s +2bps (-0.875bps), 3s -10.25bps (+0.125bps)*, 5s -21bps (+0.25bps), 7s -28.75bps (-0.375bps), 10s -29.75bps (-1bps), 20s -64.875bps (-1.75bps), 30s -72.125bps (-1.5bps).
*adjusted for the 0.5bps give.
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.
- OMERS Finance Trust plans a $TBA 5y. Leads BofA, Citi, RBCCM, TD. Aa1/AA+/AAA. Price talk mid SOFR swaps +90bps. Expected to price tomorrow.
- Walmart launched a $5bn 5-part ($750m 3y, $750m 5y, $500m 7y, $1.5bn 10y and $1.5bn 30y). Leads Citi, HSBC and Mizuho. Aa2/AA/AA. +30bps, +47bps, +60bps, +70bps and +90bps.