USD Swaps: Bear-flattening extends but ready for pause?

Fed sunny 9 Jun 2022
Rising rate hike expectations sees the front end of the USD fixed income curve now pricing in nearly 25bps of May hike. Job done?

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  • Bear-flattening extends but ready for pause?

  • BNPP: Fedspeak points to rising May hike risk

  • New issues: EIB, ADB, JBIC, Taqa


    Bear-flattening extends but ready for pause?

    As noted by BNP Paribas below, last week was a bearish one that sent May rate hike expectations soaring from 66% on Tuesday, to 82% on Friday to currently around 88% as the US fixed income curve continues to bear-flatten.


    Today has so far seen a relatively gentle extension of Friday’s move as 2y yields have risen 5bps to 4.15% (versus +13bps on Friday), while 10y yields are +3bps at 3.55% and 30y is +3bps at 3.76%.


    But after tighter ranges were in place during London trading earlier this morning, the bear-flattening move is gathering pace again as the market seems resigned to more Fed action next month.


    That said, with no Fed speakers today and only second tier data to be released (Empire Manufacturing being the most notable of today’s releases with a rise to -18.0 expected) it may be that the market, content to have priced in nearly 25bps of May hike into the front-end, will be happy to focus on spread flows as the schedule for new issuance for today and Tuesday builds at a decent rate.


    So far today spreads have been heading lower at all points apart from the 3y sector, with 2y -1bp at 0.25bp, 5y is a touch more negative at -22.0bps, 10y is -0.25bps at -30.25bp and 30y is -0.5bps at -72.25bps. Elsewhere, Bund yields closely tracked Treasuries with a 3bps push higher while the idiosyncratic gilt market saw 10y yields buck the global trend to drop a bp.


    Equities were lightly mixed so far today with Dow futures +0.2% and the Dax microscopically lower at the time of writing and the FTSE +0.2%. With fixed income seemingly settling after its latest upwards repricing of rate hike risks, and equities not sure where to go amid ongoing worries about rising wages and yields, markets remain captive to inflation expectations, as has been the case virtually since rates started to rise two fleeting years ago.


    BNPP: Fedspeak points to rising May hike risk

    Looking beyond this month and in the context of last week’s bearish price action in the UST market, strategists at BNPP said this morning that odds of a May hike are improving amid higher inflation expectations and hawkish Fedspeak.


    It also said that “Governor Christopher Waller noted that a lack of significant tightening in financial conditions, strong labor market, and inflation far above target requires monetary policy ‘to be tightened further’. While not particularly surprising from one of the FOMC's most hawkish members, the remarks echo other FOMC participants views that the Fed will need to tighten further at the upcoming meeting. So far, only Chicago Fed president Austan Goolsbee has signalled a significant degree of caution suggesting he would prefer to skip a hike at the May FOMC meeting. Upcoming Fedspeak this week will feature many of the recent speakers (Goolsbee, Williams on 19 April, Waller, Mester, Bowman and Bostic on 20 April) who will likely strike a similar tone to their previous remarks.”


    But looking beyond May and BNPP predicts a different tone. “We see a pause in rate hikes by June and express our view of a steeper curve via a 6m fwd 2s10s SOFR swap steepener and a 6m1y receiver swaption butterfly.”


    New issues: EIB, ADB, JBIC, Taqa

    • Ontario Teachers’ Finance Trust plans a USD 5y bond at around swaps +80bps via BofA, Citi, NBC and RBC. Expected Tuesday.


    • The EIB plans a USD 7y Global at around swaps +41bps via Barclays, JPM and MS.


    • ADB plans a USD 5y Global at around swaps +38bps via BofA, BMO, BNPP and HSBC. Expected to price Tuesday.


    • Japan Bank for International Cooperation plans a USD 3y, swaps +50bps or so bond issue via Barclays, BofA, Citi and Nomura (B&D).


    • Abu Dhabi National Energy (Taqa) plans a two-tranche USD issues consisting of a long 5y at around USTs +90bps and a 10y Green Bond at around +120bps via BNPP, ENDB, FAB, HSBC, ICBC, IMI, Scotia, SMBC and Standard Chartered (B&D).


    • Jakarta-based Green energy company Pertamina Geothermal has mandated, ANZ, BNPP, Citi, HSBC, Mandiri, MUFG, SMBC and United Overseas Banks to lead a USD benchmark Green Bond issue following investor calls.


    • Kookmin Bank plans a USD 5y bond at around Treasuries +135bps via BofA, Citi (B&D), HSBC, JPM, KDB and MUFJ.


    • CK Hutchison plans a USD 5y and 10y bond issue via BofA, Barclays, BNPP, HSBC, JPM, Mizuho and Standard Chartered.