USD Swaps: Pause "maybe" post 25bp hike; Spreads widen

Pause "maybe" post 25bp hike; Spreads widen   

The FOMC raised rates 25bps in an unanimous vote and by omitting a key phrase “some additional policy firming,” signaled that a pause might be in the wings. Treasuries initially retreated off the intraday highs after the FOMC release, but have since rebounded to further gains after the Q&A, with yields anywhere from 3.5bps to 14.5bps lower on the day. The 10y note yield is last 8bps lower at 3.352% while 2s10s is 3bps steeper at -51bps.

In determining the extent of any additional policy firming, the Fed will take into account “the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” according to the statement. Further, in the Q&A, Powell stated that “we’re getting closer, maybe there for a pause.” As for the condition of the banking sector, Powell called it “broadly improved," while the statement deemed the banking system “sound and resilient” but added “tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation.”

Equities sold off out of the FOMC and ended lower across the board (DJIA -0.8%, S&P -0.64% and Nasdaq -0.46%) while the KBW Banking Index closed at the lows of the day at down -2%. Meanwhile regional banks such as PacWest (-3.4%), Western Alliance (-4.3%), Zions (-5%) dropped post-FOMC.

Swap spreads widened out in the belly and longer end of the curve to new wides, with some breaking out of the upper end of the recent range (7y, 30y) amid lower than average volumes. IG new issuance took the day off as per usual on FOMC event days, and the weekly volume currently stands at $27.6bn or roughly $5bn shy of the median estimate of around $32.5bn for the week.  

Meanwhile, futures in the front end have more than 75bps of cuts priced in by year end, and one source pointed out that while the Fed-line is divergent from what the market is pricing, he was coming around to the cuts priced into the curve, considering the concerns around “commercial loans, tighter lending standards, rounds of more layoffs and weak manufacturing data.”  

2s -1.125bps (-0.375bps), 3s -11.375bps (+0.5bps), 5s -17.75bps (+1.375bps), 7s -24bps (+1.875bps), 10s -24.5bps (+1.5bps), 20s -59.75bps (+2.375bps), 30s -67.375bps (+1.5bps).

New issues  

• Blackstone buyout vehicle Copeland (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.