USD Swaps: USTs bear-flattening as risk-on returns; Sluggish data; 7y auction

Chart red green numbers 13 Jun 2022
USTs are bear flattening amid today’s risk-on move and despite a batch of sluggish data. JP Morgan previews 7y auction.

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  • USTs bear-flattening as risk-on returns; Sluggish data; 7y auction

  • New Issues


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    USTs bear-flattening as risk-on returns; Sluggish data; 7y auction

    Tech shares continue to buoy sentiment as better-than-expected earnings from Meta Platforms Inc. yesterday after the market close on the heels of positive surprises from Alphabet Inc. and Microsoft Corp on Tuesday late. However, in a Lazarus-like twist of fate, First Republic Bank shares have bounced back 5.46% today on blind hope (?).  With this, risk-on is the vibe today with all the major domestic equity indices in the black (Dow +0.66%, S&P +0.8%, Nasdaq +1.64%).


    Meanwhile, in the data this morning, jobless claims came in slightly better-than-expected (+230k versus +248k consensus). However, the rest of today’s data prints painted a sluggish picture on the economy and a hotter outlook on inflation. To be sure, GDP (+1.1% versus +1.9% consensus), personal consumption (+3.7% versus 4% consensus), pending home sales -5.2% MoM versus +0.8% consensus) and Kansas City Fed (-10 versus +2 consensus) all disappointed while core PCE jump higher than expected last quarter (+4.9% versus +4.7% consensus).


    Against this backdrop, Treasuries are bear-flattening once again with the benchmark 2y note yield up 10.9bps at 4.058% while the 2s10s spread is 4bps narrower at -54.5bps.  Shorter in, SOFR futures are currently up to 14.5 ticks softer while SOFR swap spreads tighter with overall flows once again running well-below average in all but the 10y tenor.  Meanwhile, IG issuance continues to hit the tape with deals from Philip Morris, Constellation Brands and KfW just some of the names lined up this session.


    Ahead, Treasury will close out this week’s supply cycle with today’s $35bn 7y note auction after both this week’s $42bn 2y note and $43bn 5y note auctions we met with decent demand.  Heading into today’s supply, strategists at JP Morgan believe that more cheapening in the issue may be needed for a smooth landing.  The bank highlights the following:


      ”… The March auction cleared 1.3bp cheap to pre-auction levels as the share of end-user demand decreased 1.7%-pts to 84.6%, the least since December. Auction allotment data shows foreign investor takedown improved slightly to 13.3%, while investment manager demand reduced to 68.6%.


      “…Over the interim period, 7-year yields have declined 17bp and intermediate Treasuries continue to flag as rich relative to their fundamental drivers.


      “…Along the curve, the 7-year sector appears fairly valued versus the wings after adjusting for the level of yields and the shape of the curve. Meanwhile the WI roll opened at -1.5bp, in line with our estimate, and has since cheapened in excess of the erosion of carry.


      “…While we could see better buying heading into an early month-end on Friday, recent volatility and reduced risk appetite could keep some investors on the sidelines.


      “…Given mixed valuation signals and low risk appetite, we believe this auction is likely to require some concession from current levels in order to be absorbed smoothly.”


    Currently, SOFR swaps – 2s 1bps (-2bps), 3s -11.25bps (-1.25bps), 5s -20.75bps (unch)*, 7s -29.125bps (-0.75bps), 10s -28.875bps (-0.375bps), 20s -65.375bps (-1.125bps), 30s -70.75bps (-0.375bps).


    * adjusted for the 0.5bps give. 



    New issues

    • Philip Morris is working on a 4-part tap (4.875% 2/26, 4.875% 2/28, 5.125% 2/30, 5.375% 2/33) via BBVA, GS and WFS.  A2/A-/A.  Price talk: +110-115bps area, +135-140bps area, +165-170bps area, +185-190bps area.


    • Anglo American is working on a 10y benchmark via HSBC, GS, BMO and Scotia.  Baa2/BBB+/BBB+.  Price talk: +230bps area.


    • Constellation Brands is working on a 10y benchmark via BofA, GS, JPM an d WFS.  Baa3/BBB.  Price talk: +170-175bps area.


    • KfW plans a $1bn short 2y EMTN at swaps +12bps. Leads are BofA, BMO (B&D) and TorDom.


    • Korean oil firm SK on (Aa3) plans a USD 3y Green bond guaranteed by Kookmin after meeting investors from Apr 27. Leads are BNPP, CA, HSBC, JPM, MUFG and StanChart.   


    • Italian government agency CDP (BBB/BBB) launched a $1bn 3y at Treasuries +200bps through BNPP, BofA, Citi (B&D), GS, HSBC, IMI-Intesa Sanpaolo, JPM, MS and SocGen.


    • State Bank of India (BBB-) priced a $750m 5y at Treasuries +145bps through Citi (B&D), ENBD, HSBC, JPM, MUFG and StanChart.