USD Swaps: Edging steeper; AFS talk; Debt limit risks
Edging steeper, wider
Mild weakness in risk asset alongside gains for short dated Treasuries have left the curve a touch steeper with the 5y rallying to test 3.60% this morning before coming back a touch to 3.61% (-2bps) at the time of writing. PMI data are due shortly and will be important following yesterday’s weak Philly Fed survey with the manufacturing PMI seen little-changed at 49.0 while the Services PMI is projected to fall back about a point to 51.5. For the FOMC, Philadelphia Fed President Patrick Harker, speaking overnight, said that rates were “pretty close” to where they needed to be while Governor Lisa Cook speaks later today. SOFR futures are 5-7 ticks stronger in the reds.
In the news, the WSJ reports that the Fed is (unsurprisingly) looking at the loophole that allowed banks like SVB with less than $250bn in assets to exempt gains and losses on AFS holdings from their capital ratio. The paper adds that the issues thrown up by SVB around HTM assets may also be addressed "later” by the Fed. Banks' appetite for duration via holding Treasuries and MBS, plus associated hedges (if the banks concerned even bother to hedge...) could both be affected.
Meanwhile swap spreads are edging wider with 2s at -0.125bp (-0.25), 5s at -21.00bps (+0.25), 10s at -29.00bps (+0.25) and 30s at -69.50bps (+0.50). Swap volumes are above average in 3y to 5y so far, but slightly below par further out the curve.
Barclays: The debt limit, fiscal risk and yields
Bills maturing around the potential x-date from mid-June to August and US sovereign CDS (currently testing 50bps for 5y, its highest level since early 2012) are both reflecting positioning for risks around the debt limit. But what about Treasuries and further out the curve? Despite talk of default risk, Barclays today sees some downside risk to yields from the debt limit as the political rhetoric heats up, as the bank explains:
- “While incoming tax receipts suggest that the x-date is still likely to be in late July/early August, the possibility of an earlier deadline in June can not be discounted, particularly if the Treasury is too cautious about low cash levels.
“This suggests there is a possibility that the Congress may have less time on hand to deal with the debt limit impasse. While this increases the odds of a short-term extension, it might also negatively affect sentiment.”
What if the debt limit isn’t raised in time? Barclays flags up the risk of fiscal tightening if debt servicing has to be prioritised over federal spending:
- “The bigger issue for bond investors is the fiscal contraction that would need to be put in place, rather than a debt default. In 2011, the Treasury and Fed officials had devised a delayed payment schedule in the event the debt limit was not raised in time, which would avoid a default.
“Since the Treasury would not be able to net issue debt, all outlays would need to be made out of incoming revenue. The budget deficit would thus be eliminated, even if for a short period of time…and could lead to a decline in yields.
“Most likely the debt limit will be raised in time, but the question will be what such a resolution means for the outlook for fiscal policy. While the Republicans’ position is likely a starting point in the negotiation, large spending cuts would be seen as adversely affecting the growth outlook. This would lead to lower Treasury yields in the intermediate sector onward
“We therefore see the outlook remaining uncertain, which justifies having cheap protection for left hand side tail risks, via forward starting steepeners”.
Callables and Formosas: JPM
- JP Morgan Chase sold a $22m 10y NC5 fixed callable Formosa. The EMTN matures May 2033, is callable annually from May 2028 and pays a 5.00% coupon. Leads are Sinopac, JPM and Shanghai Commercial. Announced April 18.
- Hungarian Export-Import Bank (BBB-/BBB) is preparing a USD short 5y through ICBC, IMI-Intesa Sanpaolo and JPM after meeting investors from April 21st.
- Mexico yesterday priced a $1.35bn 30y via Citi, HSBC, Mizuho and MS. Baa2/BBB/BBB-. +260bps.