USD Swaps: Banking contagion fears flare; Positioning for one more and done

Click here for SDR USD IRS trades.

Banking contagion fears flare again; Positioning for one more and done

PacWest Bancorp and Western Alliance Bancorp may be the next shoes to fall in the regional bank crisis with their shares are down 34% and 20%, respectively, after multiple trading halts today as contagion fears rise in the wake of First Republic Bank's recent demise.  Accordingly, the major domestic equities are all solidly in the red today (Dow -1.45%, S&P -1.33%, Nasdaq -1.37%).

And with this latest development on the banking front serving as an accelerant after this morning’s round of softer-than-expected data (i.e. JOLTS, factory orders), Treasury yields have ricocheted sharply lower as the market bull-steepens.  The benchmark 2y note is last 18.4bps lower at 3.947% while the 2s10s spread is 5.3bps wider at -52.6bps.  Meanwhile, red SOFR futures are a solid 21.5 to 23 ticks firmer while SOFR swap spreads are all softer amid below average activity in the shorter tenors (i.e 1y-3y) while the back end has recovered off the earlier dive lower. 

Looking ahead to tomorrow’s FOMC decision, strategists at SocGen believe that “the Fed’s aggressive hiking campaign is likely to end soon,” with the bank expecting “another 25bp hike” and then “a pause thereafter to allow for tighter policy to percolate through the economy.”  SocGen expounds:

”…A hike in May and ‘on-hold’ policy for the remainder of the year seem likely, unless fundamentals deteriorate meaningfully in 2H, warranting a policy pivot. Market pricing of cuts in 2H seems to reflect a higher probability of that outcome. Investors remain on edge following the regional banking crisis and recent headlines seem to be reviving those concerns. Bonds are likely to remain volatile. As Fed Governor Cook recently said, the “path back to lower inflation is likely to be long and bumpy”.”

As for positioning heading into the Fed, SocGen remains “neutral on rates over the near term,” but believes that “risks to yields are skewed to the downside on weak data. With the front end pegged, the yield curve could flatten over the near term, offering an opportunity to initiate steepeners.”  Below the bank assesses the current positioning of the broader rates market:

”…Speculators continue to hold net shorts across the curve, with total shorts increasing during the week ending 18 April to close to the record levels reached on 28 February. The current positioning is well beyond the shorts held during the last hiking cycle. The surge over recent weeks has been led by a sharp uptick in the 10y sector, as shorts positioning in the TY contracts hit its highest level since October 2018 during the latest reported week and the shorts positioning in the UXY contracts reached an all-time high…On the other hand, speculators have cut their shorts at the long end (US+WN) in all but one of the past seven weeks. Historically, speculators’ positioning in 10y and 30y futures has mostly moved in tandem; however, their positioning over recent weeks has diverged as they have continued to add to their shorts in the TY and UXY contracts while cutting their shorts at the long end>”

 

“…Recent price action suggests fresh long positioning, as a sharp rally on Monday and Tuesday coincided with an increase in open interest across most of the contracts. Open interest data shows an increase of close to 41k and 95k in 2y and 5y contracts over these two days as markets rallied. The latest surge led to aggregate open interest in the TU and FV contracts on Tuesday, reaching the highest levels since 24 Feb and March 2020 respectively. TY contracts saw an increase of approximately 21k contracts on Monday, suggesting new longs and a drop of 28k contracts on Tuesday as yields sharply dropped, suggesting perhaps short covering and likely.

 

“…Our view coming into this year was that risks to yields were asymmetrically skewed to the downside and we continue to hold that view. Any meaningful reversal, by which we mean a sell-off in bonds and higher yields, is likely to be a buying opportunity. Likewise, our core view on the curve is steepeners. Any momentum-led flattening of the curve will be an opportunity to re-initiate or add to existing steepening positions.”

Currently, SOFR swaps -  2s -0.75bps (-1.125bps), 3s -12.375bps (-1.25bps), 5s -19.75bps (-0.625bps), 7s -26.5bps (-0.375bps), 10s -26.625bps (-0.625bps), 20s -62.625bps (+0.125bps), 30s -69.75bps (-0.5bps).

New issues

• Barclays (Baa1/BBB) plans USD 4y NC3 and 11y NC10 bonds at around Treasuries +230 and 295bps. Self-led.

   

• Glencore (Baa1/BBB+) is preparing USD 3y, 5y and 10y bonds through DBS, HSBC, JPM, MS and Santander. Seen at around Treasuries +165, 195 and 230bps, respectively.

   

• Tenet Healthcare (B1/BB-) plans $1.35bn in 8y NC3 senior secured notes. Leads are Barclays, BofA, CAPONE, Citi, DB, FT, GS, JPM, MS, RBC, Santander, Truist and WFS.

   

• SK On (Aa3) plans a $900m 3y Green bond guaranteed by Kookmin at Treasuries +155bps. Leads are BNPP, CA, HSBC (B&D), JPM, MUFG and StanChart.