USD Swaps: Risk assets slip; X-date debate

Risk asset slip lifts USTs

Treasury yields are down 3-5bps and sit just above session lows led by the 5y at 3.52% (-5bps) as earnings news weighs on risk assets. S&P futures are 0.5% lower and the Nasdaq is -0.4% ahead of benchmark first quarter numbers from Alphabet and Microsoft.

Among the banks, UBS shares are off opening lows but remain 1.5% weaker after confirming lower profit and revenues in Q1 2023 albeit alongside ‘strong’ client inflows. In its global markets division, UBS reported a 1% rise in FICC revenues to $658m driven mainly by credit but partly offset by weaker FX and rates.

Elsewhere, First Republic shares are down 21% in pre-market trading after the bank confirmed that it had been hit by $102bn in deposit flight.  

SOFR futures are as much as 11 ticks higher in the reds ahead of the Philly Fed non-manufacturing index, S&P house prices (consensus is -0.35%mom/-0.10%yoy), new home sales (-1.3%mom), consumer confidence (104.0) and the Richmond fed index (-8 versus -5). 

With no new deals on the screens and stocks lower, swap spreads are little-changed at -2.00bps (-0.25) in 2s, -21.00bps (unch) in 5s, -28.50bps (+0.125) in 10s and -69.25bps (+0.125) in 30s.  SOFR outright swap volumes are slightly above average at the longer end of the curve from 10y to the 30y bucket.

In the news, JP Morgan’s latest client survey reported a rise in the ‘All clients’ net long balance to +9% for the April 24 week, the highest since August 2020 according to Bloomberg, from 0% for the previous week. The ‘Active clients’ balance jumped to 0% from -22%, the highest since late March.     

X-date debate – Banks

Amid discussion about the risk of a debt limit X-date that could arrive as soon as next month, Barclays accepts that while the Treasury’s cash balance may get “thin” in early June, thanks to weaker tax receipts, its baseline forecasts still show the X-date landing in "late July, and not early June". Barclays continues:

“We believe that the Treasury has the operational/legal ability to prioritize coupon payments if needed. Our baseline is that the debt ceiling will be raised before the ‘X-date’, as in every instance so far. If the ‘X-date’ is breached, we expect a risk-off, but not a collapse in financial markets/ the economy. However, every day past the ‘X-date’ will increase fiscal contraction, and be more disruptive”

In contrast, Deutsche Bank sees a slightly later X-date:

“Tax receipts in April (have met) our expectations so far, keeping the most likely X-date in August, with stressed scenarios suggesting late July.

 

“We anticipate distinct market reactions to a no deal scenario: 1) funding stress, 2) tightening of financial conditions, and 3) repricing of lower growth. In rates, a likely evolution of the yield curve is initial bull flattening and ultimately bull steepening.

 

“Treasury would likely continue making interest and principal payments while delaying other government payments. Surprise offering announcements to match new settlement with maturing securities could lead to larger auction concessions. Failed auctions are also a risk.

 

“Potential Fed actions include temporary measures such as broadening  access to the standing repo facility, restarting MMF and primary dealer liquidity facilities, and exempting Treasuries from the SLR calculation. Outright purchases of affected securities and CUSIP swaps are possible but likely the most controversial.”

Given this background – and following the release first few non-financial first quarter earnings reports - what about cross-asset valuations? Barclays again:

“European and US equities both seem very fully priced, but every small dip keeps getting bought. While we see little upside in stocks, their resilience has been extremely noteworthy.

 

“We still think bond markets are the place to push back on market pricing. Options markets still assign a 30% chance of the Fed cutting below 4% by year-end. We recommend staying short the front-end (SFRZ3), paired with forward steepeners.

 

“In general, our outlook is that the world economy is slowing, but slowly and primarily due to the lagged effects of cumulative rate hikes. We expect range-bound markets to persist until May FOMC and US payrolls”

Callables and Formosas: Merrill Lynch

• Merrill Lynch sold a $30m 10y NC4 fixed callable Formosa. The EMTN matures May 2033, is callable annually from May 2027 and pays a 5.20% coupon. Lead is  Shanghai Commercial and announced April 24.

New issues

• State Bank of India (BBB-) is preparing a USD 5y through Citi, ENBD, HSBC, JPM, MUFG and StanChart after meeting investors from April 25th. 

   

• 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.

   

   

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

   

• BOC Aviation plans a USD-denominated, 10y bond issue at around Treasuries +195bps 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.

   

   

• CIBC yesterday priced a $2.25bn 2-part ($1.25bn 2y and $1bn 5y). Leads BofA, CIBC, JPM, MS and UBS. A2/A-/AA-.  +103bps and +142bps.