USD Swaps: USTs follow Gilts lower; 20y auction preview; Beige Book, Fed-speak

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USTs follow Gilts lower; 20y auction preview; Beige Book, Fed-speak

Signs that inflation across the pond remains stubbornly high – a whopping 10.1% YoY in the UK, though down from the multi-decade high of 11.1% hit in October - has put a wet blanket on the global fixed income market today.  Indeed, in a largely sympathetic move, Treasuries remain in bear flattening mode with the benchmark 2y note yield currently 6.2bps higher at 4.259% while the 2s10s spread is roughly 1bps narrower at -63.7bps. 

In swaps, spreads remain narrowly mixed with the wings outperforming amid below-average SOFR IRS volumes in all but the 3y and 5y tenors thus far.  In the backdrop, both BNY Mellon and Morgan Stanley have joined Bank of America in the FIG new issuance paddock today despite a modestly sullied risk backdrop (Dow -0.25%, S&P -0.24%, Nasdaq -0.25%).

Ahead, Treasury will auction $12bn reopened 20-year bonds (Feb43s) at 1pm today, unchanged from the previous reopening auction last month.  Heading into today’s supply, strategists at JP Morgan believe that the issue will be taken down with little difficulty.  JP Morgan highlights the following:

”… The March auction tailed 0.4bp to pre-auction levels, as the share of end-user demand declined to 88.1%, the lowest since October of last year. Indeed we saw both the foreign share and investment manager takedown decrease below their recent averages.

 

“… After traversing a 50bp range, twenty-year yields are only 1bp lower from their March auction levels. The sector has outperformed along the curve over the past month with the 10s/20s/30s butterfly narrowing 5bp, but this move seems justified with the butterfly looking fairly valued relative to the wings after adjusting for the level of 20-year yields, the slope of the 10s/30s curve, and the level of HG spreads as a proxy for risk appetite.

 

“…Meanwhile liquidity conditions have improved, with market depth in the sector recovering to its highest level since December.

 

“…. Overall, with 20-year yields roughly 23bp above their local lows reached two weeks ago, and liquidity improving, we expect (today’s) auction will likely be digested smoothly.”

Closely on the heels of today’s 20y bond auction, the Beige Book will be released (2pm) followed by Fed-speak from Chicago Fed President Goolsbee (voter/dove) as well as New York Fed President Williams (dove) - both of whom spoke extensively last week.  Strategists at Deutsche Bank recall that:

”..Goolsbee appeared to be more cautious about further hikes while Williams continued to endorse the March SEP median as ‘reasonable’, emphasizing that the inflation data continued to look strong and that price developments would guide Fed policy decision making as we get into the back half of the year. Indeed, relative to a month ago, when market pricing for the yearend fed funds rate had plunged to roughly 3.75%, current pricing of 4.50% is much more reasonable.”

For its part, Deutsche Bank’s own forecast “continues to see the Fed holding steady at 5.1% through year end, before beginning to cut rates in January 2024.”

Currently, SOFR swaps – 2s 1.5bps (+0.5bps), 3s -8.875bps (+0.125bps), 5s -20.375bps (unch), 7s -28bps (-0.375bps), 10s -28.5bps (-0.125bps), 20s -62.375bps (+0.125bps), 30s -69.625bps (+0.25bps).

Callables and Formosas: RBC

• Royal Bank of Canada sold a $15m 15y NC6 zero coupon callable (non-Formosa). The EMTN matures Apr 2038 and is callable annually starting Apr 2029. Self-led. Estimated IRR 5.7%. Announced Apr 19.

New issues

• BNY Mellon is working on a 4NC3 and 11NC10 benchmark via BNYM, Citi, GS, RBC and SAMRCO.  A1/A/AA-.  Price talk: +130bps area, +165bps area.

   

• Morgan Stanley is working on a 3y, a 6NC5 and 11NC10 benchmark via MS and MNUFG.  A1/A-/A+>. Price talk: +105bps area, +160bps area, +180bps area.

   

• Bank of America is preparing USD 6y NC5 and 11y NC10 fixed to floating rate bonds at around Treasuries +170 and 190bps. Self-led.   

   

• Japan Finance Organisation for Municipalities (JFM) (A1/A+) plans a USD  5y in the area of swaps +81bps. Leads are Barclays, BofA (B&D), JPM and Nomura.

   

• China’s New Development Bank (AA+/AA) is preparing a $1.25bn 3y Green bond at swaps +125bps. Leads are Citi, CA, HSBC and ICBC.

   

• Canada launched a $4bn 5y Global at Treasuries +11bps via Barclays, BofA, CIBC, RBC and TD (B&D).