USDi: BEs follow First Republic Bank shares lower

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BEs follow First Republic Bank shares lower

Just when market participants thought all was fine and well in the banking system, First Republic rattled the cages again with its shares dropping a whopping 49% today after announcing an outsized $102bn drop in deposits in the first quarter – once again rekindling concerns over the stability of the banking system. 

And the subsequent souring in the broader tone intraday that hit both equities and energy (S&P -1.58%, gasoline -1.66%, Brent -2.31%) as well as the corresponding bull-steepening rally in nominals (~6-15bps) increasingly weighed on TIPS breakevens and inflation swaps intraday.  With the dust settling into the close, dealers are marking the inflation curves roughly 3-10bps lower in the 2y-30y sector as they bear steepened sharply today.

“Breaks were offered all day and the short term was the main loser with 1y down -9bps,” one dealer explained.  “A buy the dip midday bounce back was sold aggressively as Treasuries extended their rally and energy failed to recover,” he continued. 

In derivatives-space, inflation swap trades on the SDR today included 1y ZC swaps at 245bps, 244.5bps, 244bps, 238bps, 236bps and 235bps, 2y ZC swaps at 241.75bps and 243bps, 3y ZC swaps at 245.25bps, 5y ZC swaps at 250.625bps, 8y ZC swaps at 251bps, 9y ZC swap at 250.625bps, 10y ZC swaps at 252.5bps, 252bps and 250bps, 20y ZC swap at 242.25bps, and 30y ZC swaps at 239.75bps (for all of today’s trades, see Total Derivatives SDR, which now also includes information on broker/platform).

Lastly, later this week the main data focus is likely to be the quarterly ECI reading out on Friday (+1.1% Q1 Bloomberg consensus), as many consider that series the best indicator of wage pressures.

Heading into the final hour of trade, the 2y breakeven is going out at 219.25bps (-10.25bps), 5y at 227.125bps (-5.875bps), 10y at 224.75bps (-3.375bps) and 30y at 223.25bps (-2.5bps).

Barclays: Where do we go from here after 5y TIPS auction?

With last week’s $21bn 5y TIPS auction now in the rearview mirror (see Total Derivatives), strategists at Barclays have taken a look historically for whether there has been consistent systematic price performance following 5y TIPS auctions. 

And while there are many different ways that once could slice this analysis, but, from Barclays’ perspective, it made most sense to consider performance of both the on-the-run 5y and off-the-run 5y (at time of auction, so in the current instance that would be the TIIOct27 and TIIApr27) in real yield, breakeven, and iota, as well as the 5y5y real yield and breakeven (built using the on-the-runs) – focusing its analysis on price action in the five trading days following the auction.  Based on the framework, Barclays concludes the following:

”…In short, our analysis falls short of providing any massive ‘slam dunk’ systematic takeaways — especially on a liquidity-adjusted basis — but does offer a modest signal that the 5y sector has consistently richened after new issue auctions since 2019. For context, in real yield, the on-the-run has rallied 88% of the time in the five trading days post auction since the new schedule was implemented in 2019 (and 62% of the time since 2013). This has translated to a 8.3bp rally, on average, after new issue auctions since 2019. Following April 5y auctions specifically, both the on-the-runs and off-the-runs have rallied 100% of the time since the auction schedule shifted; though admittedly that is only a sample size of four thus far.

 

“…Moreover, in iota, after April auctions in the new schedule, the on-the-run and off-the-run have tightened by an average of 1.4bp and 1.9bp, respectively, while breakevens, in turn, have gained 5.4bp and 12.9bp. At first glance, there appears to be something here.

 

“…Of course, just because price action has been something on average does not mean that in a volatility-adjusted there is any signal among the noise. In an attempt to control for the noise, we generated a t-statistic for post-auction price performance by scaling the average change by the corresponding standard deviation. Doing so confirms our prior belief that most observed patterns are not statistically significant, though, to be fair, the t-stats for new issue and April auctions are non-negligible.

 

“…Putting these findings together, we see additional support for holding our recommendation to position for a tighter iota in the TIIApr27 (enter at 19.7bp, latest 19.8bp), as it was originally implemented in anticipation of seasonal TIPS fund inflows, which have potentially largely run their course.”