USD Swaps: Data shifts UST bull steepener into higher gear; 5y TIPS auction view

A batch of weaker-than-expected data has taken the focus off of earnings and fueled further bull-steepening in USTs. Dealers preview 5y TIPS auction.

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  • Data shifts UST bull steepener into higher gear; 5y TIPS auction view

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    Data shifts UST bull steepener into higher gear; 5y TIPS auction view

    Market participants continue to be flooded with corporate earnings today but much of the focus has shifted to the data as today's batch has reinforced the slowing economy/recession narrative. Indeed, Initial jobless claims came in higher than expected at +245k versus +240k, Philly Fed sank down to -31.3 versus -19.3 consensus, existing home sales fell -2.4 % versus -1.8% consensus, and leading indicators dropped a bigger than expected -1.2% versus -0.7% consensus.


    Against this increasingly troubling backdrop, major domestic equity indices are lower but off their earlier troughs (Dow -0.23%, S&P -0.41%, Nasdaq -0.34%) while USTs have shifted this morning’s nascent bull-steepener into higher gear. The benchmark 2y note is last 8.4bps lower at 4.159% while the 2s10s spread is 3.15bps wider at -62.75bps. 


    Meanwhile, red SOFR futures are now up to 16.5 ticks firmer ahead of Fed-speak from Waller, Mester, Bowman, Logan and Bostic.  And in swaps, spreads remain mostly tighter amid below-average SOFR IRS volumes in the shorter tenors ahead of a potentially swapped deal from Japan Finance Organisation for Municipalities.


    Ahead, Treasury will auction $21bn in new-issue 5y TIPS (Apr28s) with TIPS breakevens down roughly 1-6bps as crude oil prices slip further (..down -1.79%).  Heading into today’s auction, one trader expects “a very good auction”, explaining that “the market is still very interested in owning TIPS with breaks between 230bps and 250bps below the 5y sector” which he felt was “a good omen” for today’s auction.


    For their part, strategists at JP Morgan seem to have little conviction one way or the other on today’s 5y TIPS auction, but they note that the 5y breakeven trades “cheap” in their view.  The bank highlights the following:


      ”…The last 5-year auction tailed 1.0bp cheap to pre-auction levels, as end-user demand declined to 91.9%. Auction allotment data show that foreign investors took down 18.3%, a step down from the record 22.7% share at the October auction but still at historically elevated levels, while investment manager demand rose to 72.7%.


      “…Since the December auction, 5-year real yields have declined 11bp, though they are about 4bp higher net of carry, and about 34bp above their lows reached two weeks ago. Meanwhile, breakevens have traversed a 50bp range but are little changed since the last auction and are trading near the middle of their 3-month range, after adjusting for carry.


      “…On a relative basis, 5-year breakevens have underperformed versus commodity prices and credit spreads in recent weeks and now appear roughly one standard deviation cheap to our fair value model. The WI roll opened at +6bp and has narrowed to +2.2bp, outperforming the erosion of carry.”


     For more TIPS action previews, please see Total Derivatives and Total Derivatives.


    Currently SOFR swaps – 2s -0.125bps (-1.125bps), 3s -10.5bps (-1.25bps), 5s -21.125bps (-0.25bps), 7s -28.75bps (-0.25bps), 10s -29.258bps (unch), 20s -63.25bps (+0.5bps), 30s -69.625bps (+0.5bps).


    New issues

    • Mexico is working on a 30y benchmark via Citi, HSBC, MIZ and MS.  Baa2/BBB/BBB-.  Price talk: +300bps area.


    • Pertamina Geothermal (Baa3/BBB-) is working on a $400m 5y Green at 5.15% via ANZ (B&D), BNPP, Citi, HSBC, Mandiri, MUFG, SMBC Nikko and UOB.


    • Japan Finance Organisation for Municipalities (JFM) (A1/A+) priced a $1bn 5y at swaps +81bps. Leads are Barclays, BofA (B&D), JPM and Nomura.