USD Swaps: USTs march higher while bank jitters settle into FOMC; Refunding

Chart up line Oct 2022
After an ADP-induced hiccup, USTS are marching higher into today’s FOMC decision (previewed by NatWest) while bank jitters settle a bit.

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  • USTs march higher while bank jitters settle into FOMC; Refunding

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    USTs march higher while bank jitters settle into FOMC; Refunding

    After a brief hiccup following this morning’s much stronger-than-expected ADP employment data (+296k versus +150k Bloomberg consensus), Treasury yields have resumed their march lower in a move once again led by the belly. The benchmark 10y note yield is last 5.6bps lower at 3.367% while the 5s30s spread is roughly 0.8bps wider at 26.9bps. Shorter in, red SOFR futures are 8.5 to 9.5 ticks firmer while SOFR swaps spreads are mostly wider amid below average activity in all but the 5y and 10y tenors today. 


    In the backdrop, the major domestic equity indices are largely treading water (Dow -0.14%, S&P -0.12%, Nasdaq +0.24%) after yesterday’s regional banking induced scare. Indeed, after a 4.47% drop yesterday, the KBW Banking Index is a much more modest -0.28% lower today with many still parsing through the recent wreckage. 


    And in an ominous sign today, former Dallas Fed President Kaplan said that he thinks “the banking situation may be more serious than we currently understand.”  And this sparked one source to only somewhat jokingly quip that “funny, I don’t recall a single one of these ‘experts’ talking about this before it happened. If it’s so blatantly obvious, where were they four months ago?”


    Against this backdrop, market participants will be hanging on every word of the Fed’s interest rate decision today as well as Fed Chair Powell’s presser. Though the Fed has not explicitly stated it, today may likely mark the end of the Fed’s tightening cycle with a 25bps hike today.  For their part, strategists at NatWest agree that “the odds favor a 25bp hike,” and they expound on their view below:


      ”…The principal case for a 25bp hike rests on the idea that the more the Fed does now, the less it could have to do later if inflation remains stubbornly sticky. In addition, officials could also worry that if they don’t deliver on earlier guidance that inflation expectations could rise if they are seen as “losing their nerve” on inflation. From that perspective, there hasn’t been enough progress in Powell’s nonhousing core services PCE number since the March FOMC meeting. Friday’s PCE price data showed core services ex housing up by 0.2% m/m, with the six-month annualized rate at 4.6% (through March) and wage pressures still elevated. The chair has highlighted the core services ex housing series as one of the keys to getting inflation back to the 2% target, and since the March meeting that measure has made very little progress.


      “…On the flip side, financial markets will not (yet) be privy to results of a key signpost that officials will consider at the upcoming meeting: the April Fed’s Senior Loan Officer Opinion Survey (SLOOS), which seem likely to indicate a higher fraction of banks’ tightening lending standards. In our opinion, this unknown will likely make the call whether the Fed hikes or not much closer than what financial markets are currently priced for. Market participants need to remember that despite markets almost 90% priced in for a hike in the days leading up to the March meeting, the minutes from that meeting revealed that ‘Several participants noted that, in their policy deliberations, they considered whether it would be appropriate to hold the target range steady at this meeting. They noted that doing so would allow more time to assess the financial and economic effects of recent banking-sector developments and of the cumulative tightening of monetary policy.’


      “…At the end of the day, the case for pausing is more of a risk management approach to policy. In our opinion, hiking another 25bps provides only a small gain in terms of the incremental cooling of inflation, but it risks triggering more damage to the economy when uncertainty is elevated. Even so, as described above, we now suspect the odds favor a 25bp hike.”


    Lastly, on the supply front, Treasury announced that it will auction a total of $96bn at next week's refunding – unchanged from the February refunding - to refund approximately $75.2 billion of privately-held Treasury notes maturing on May 15, 2023. 


    • A 3-year note in the amount of $40 billion on Tuesday May 9th, maturing May 15, 2026.


    • A 10-year note in the amount of $35 billion, on Wednesday May 10th,maturing May 15, 2033; and


    • A 30-year bond in the amount of $21 billion on May 11th, maturing May 15, 2053.


    Regarding the buyback program, Treasury stated that it “will be conducted in a regular and predictable manner, initially sized conservatively, and not intended to meaningfully change the overall maturity profile of marketable debt outstanding,” and that “given various operational and design considerations, Treasury expects to begin a regular buyback program in calendar year 2024.”


    Currently, SOFR swaps – 2s -1.875bps (-1.125bps), 3s -11.5bps (+0.375bps), 5s -18.5bps (+0.625bps), 7s -24.875bps (+1bps), 10s -25.25bps (+0.75bps), 20s -60.75bps (+1.5bps), 30s -68.125bps (+0.75bps).



    New issues

    • Blackstone buyout vehicleCopeland (Emerson Climate, Emerald Debt Merger) (Ba3/BB-/BB+) plans $2.25bn long 7y NC3 and $500m EUR equivalent long 7y NC3 secured bonds after investor calls starting May 3. Leads are Barclays (B&D), BofA, BNPP, CIBC, FITB, GS, HSBC, JPM, Mizuho, MUFG, REGSOL, RBC, Scotia, SMBC, TorDom, TSI, USB and WFS.


    • Korea Credit Guarantee Fund (Aa2/AA) is preparing a USD 3y Social bond through BNPP after meeting investors from May 8.