USD Swaps: Bank concerns loom; USTs bull flatten into ME; Debt limit jitters

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Bank concerns still loom; USTs bull flatten into month-end

First Republic Bank once again finds itself in the crosshairs today – it’s shares currently down another 39% after multiple trading halts today – on reports that FDIC receivership is the forlorn bank’s most likely fate. 

And in a move looking to bolster confidence in the broader banking system, the Fed’s Vice Chair for Supervision had somewhat of a 'mia culpa' and called for broad changes in bank rules in a lengthy report released today.  “Following SVB’s failure, we must strengthen the Federal Reserve’s supervision and regulation based on what we have learned,” Michael Barr stated in his report.

However, despite today’s looming banking concerns, all the major domestic equity indices are moving higher in the early afternoon trade as stronger-than-expected earnings from the likes of Exxon and Intel today continue to fuel higher valuations (Dow +0.73%, S&P +0.66%, Nasdaq +0.49%).

And against this backdrop, Treasuries have built on this morning’s bull-flattening move heading into the final hours of today’s month-end trade.  The benchmark 10y note yield is last 6.8bps lower at 3.452% while the 2s10s spread is 4.75bps narrower at -60.15bps. 

Meanwhile, in the SOFR spectrum, futures are up tom 7 ticks firmer in the reds while swap spreads are mostly wider amid paltry SOFR volumes in all tenors this session.  In the backdrop, IG issuance has halted for the week after roughly $17bn (ex. SSA) price – in line with initial estimates of $15-$20bn.

Currently,  SOFR swaps – 2s 0.5bps (-0.375bps), 3s -10.75bps (+0.25bps), 5s -19.875bps (+1bps), 7s -27.875bps (+1.375bps)*, 10s -27.625bps (+1.125bps), 20s -64.625bps (+0.625bps), 30s -69.75bps (+0.875bps).

* adjusted for the 0.125bps give.

Barclays: Debt limit jitters

Rhetoric with respect to the debt limit has heated up again, with the House having passed a debt limit bill.  Strategists at Barclays offer their updated timing and key thoughts below:

”…Our estimates suggest the Treasury’s x-date, or the point at which it runs out of cash and borrowing capacity, looks to be in late July. Seasonally, its cash balances get low in early June, so we cannot completely rule out an earlier x-date. We expect the Treasury soon to publish its official estimate.

 

“…Investors are becoming increasingly nervous about a potential debt limit impasse. A significant dislocation has opened up between bills maturing in May and those in June and July. This is earlier and larger than in past episodes. Similarly, while US sovereign CDS spreads embed relatively low default probabilities, they have widened significantly in recent days.

 

“…Money market investors typically avoid issues maturing in the red zone around the x-date. These are also excluded from eligible collateral lists in repo. They become harder to trade and finance. As the x-date approaches, we expect these issues to be financed through the Fed’s standing repo facility (SRF). Similarly, money fund managers may shift their balances toward RRP.

 

“…A debt limit impasse could be bullish for Treasuries, led by the intermediate sector. Should the debt limit not be resolved in time, the resulting fiscal contraction, in our view, even if short-lived, would be a bigger issue for bond investors than a debt default. Should a resolution lead to large and persistent spending cuts, investors would reassess the growth outlook lower, also likely leading to a rally. A resolution in time, with modest spending cuts, would be somewhat bearish.

 

“…In swap spreads, we believe the balance of risk is towards tightening. An increase in balance sheet premium and convexity-related receiving in a rally argue for tighter long-end spreads. Post-resolution, to what extent these factors reverse likely will depend on the magnitude of fiscal consolidation. At the front end, the sharp increase in bill supply following a resolution argues for tighter spreads, though the surplus of cash should limit material tightening.

 

“…The vol market is pricing in little additional risk premium around the key dates associated with the debt limit. Part of this may have to do with the fact that the “background” level of volatility itself is quite high. It is clear that swaption investors expect a relatively orderly resolution to the debt ceiling debate. Should that not be the case, we would expect realized volatility to pick up, like it did in 2011.”