USD Swaps: Calm start; Lower yields eyed

Chart line 30 Jan 2023
USTs reversed Friday's PMI data-driven sell-off in a calm start to a fresh week of trading. NatWest eyes lower yields.

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  • Calm start as USTs outperform

  • NatWest: Risks skewed once more towards lower yields 

  • New issues


    Calm start as USTs outperform

    Treasuries started the week on a crisp note after a data-driven soggy ending to last week’s trading. Currently, while bond yields across Europe edge 1-3bps higher, the 10y UST yield is -5bps at 3.52%, rallying at the start of business in London then holding their slight gain after treading water during Asian trading.


    A data-free Monday has contributed to a lack of volatility with UST yields trading in pretty much a 1bp range for the last few numbers as the market waits to see if the start of activity in New York can provide some impetus.


    The Fed’s balancing act between managing still-very-high inflation and expectations while not scaring the horses after the SVB banking panic  has left the market seemingly content with expectations of a 25bps hike in May, with the Fed then going away (see NatWest below).


    Which makes trading conditions reassuringly data-dependent, with the front end keeping its eye on the traditional Spring debt ceiling cliff-hanger in Washington, stand-off that has seen investors try to avoid the political uncertainty surrounding plans to raise the $31trn debt ceiling by plunging into 1-month T-bills. And while the annual battle to stop the US government going the same way as Bed, Bath and Beyond in theory could massively affect USTs, so far it hasn’t made too much difference to the further reaches of the fixed income market.


    It is though very much on the minds of market participants  (for more on that see USD Swaps) and will doubtless rumble away for weeks to come.


    A decent, but far from frenzied, start to the new issuance week in USD has been accompanied by narrowly mixed swap spreads. Currently the 2y spread is -0.5bps at -1.75bps, while 5y is +0.125bps at -21.00bps, 10y is -0.125bps at -28.75bps and 30y is +0.25bps at -69.25bps. On the curve 2s/10s is 0.8bps flatter and 10s/30s is 0.8bps steeper.


    NatWest: Risks skewed once more towards lower yields

    Last week, note strategists at NatWest, US 2y yields hit their highest level since the start of the March banking stress driven by rising expectations for a May Fed hike as well as some resilient April data, notably the unexpected rise in the Empire State Manufacturing data.


    NatWest said that “in addition to the normal ebb-and-flow of the data (Empire Fed was strong, but this was followed by a weak Philadelphia Fed), economic transition points tend to show more volatility in the data and more mixed data that creates greater uncertainty rather than less. We remain of the view that the risks to the outlook remain asymmetric… We’ve previously written that we think benchmark 2s will find support in the 4.25%-4.5% range (~3.75%-4% in 5s), and believe that with the market pricing of ~50bps of cuts by year end (after the expected May hike), risks are now skewed to lower yields again.”


    About the asymmetric risk approach, NatWest says that “the Fed may not cut at all, but we think it is very unlikely they hike past May, and while not our base case, can easily formulate an outcome that would result in a funds rate ~100bps lower or more by late 2023 and into early 2024.”


    Looking to the new week just underway, NatWest said that “The data calendar is backloaded… The focus will be the employment cost index on Friday, which is likely to show some moderation in compensation costs at the end of Q1. We also expect the core PCE deflator to post a second monthly uptick of 0.3% (0.290% unrounded) in March, which would translate to a 4.5% year/year reading (versus 4.6% in February). Market participants will also be looking to the Q1 GDP report (NWM forecast +1.3% q/q, ar). Away from these high-profile indicators, a slew of secondary indicators including the Conference Board’s consumer confidence index, durable goods, new home sales are also due (this) week.”


    New issues

    • Italian government agency CDP (BBB/BBB) plans a USD 3y to 5y bond. Via BNPP, BofA, Citi, GS, HSBC, IMI-Intesa Sanpaolo, JPM, MS and SocGen.


    • RBC is lining up a three-tranche, USD bond issue consisting of 2y fixed and floating rate bonds and a 10y fixed at about USTs +110bps, the SOFR equivalent and USTs +170bps respectively. Leads are ANZ, Citi, GS, Lloyds, RBC and TSI.


    • Packaging and container company Trident TPI Holdings plans a $620m, 5.5y NC2.5 bond via BMO, CS, Goldman and Jefferies following investor roadshows.


    • Sasol Financing has mandated BofA, Citi, SMBC, IMI, JPM, Mizuho, MUFG, SMBC and Standard Chartered to lead a USD benchmark 6y bond issue pending investor calls.


    • Autoparts and steel maker Benteler AG plans two 5yNC2 bond issues of $525m and $500m via Commerz, Goldman, JPM, MS and UniCredit.


    • BOC Aviation plans a USD-denominated, 10y bond issue via BOC International, Citi, DBS, HSBC and JPM.  


    • SMBC Aviation Capital plans a USD bond issue via Citi, Credit Agricole, Goldman, JPM, RBC and SMBC.