USDi: BEs bear-steepen as Black Gold and FOMC weigh on market

Chart red green numbers 13 Jun 2022
BEs bear-steepened today as continued softness in oil prices and today’s FOMC decision/Powell presser weighed on the market.

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  • BEs bear-steepen as Black Gold and FOMC weigh on market

  • Barclays: Stable in parts, stretched in others – Close short TIIApr27 iota trade  


    Click here for SDR inflation swap trade


    BEs bear-steepen as Black Gold and FOMC weigh on market

    Fed Chair Powell put his mouth where his money is today, stating that conditions in the banking sector have “broadly improved” and the banking system is “sound and resilient” – this coming despite continued banking jitters this week and just days after the FDIC put First Republic Bank into receivership until its White Knight (i.e. JP Morgan) saved the day


    The Fed also delivered its widely expected 25bps rate hike and ‘hinted’ that it may be the last hike by removing that it anticipates “some additional policy firming may be appropriate” from its previous statement in March.  In all, the Fed is expressed that it is concerned that tighter credit condition may choke off economic growth and hiring, while also greasing the wheels for further disinflation.  Notably, on inflation, Powel also stated that the Fed’s inflation outlook doesn’t support any rate cuts in the near future.


    In the trading screens, the major domestic equity indices headed into the FOMC decision in the red and sank further coming out (Dow -0.80%, S&P -0.70%, Nasdaq -0.46%), adding an accelerant to a rally in nominals which was already on way this morning but losing steam heading into the decision (~3-12bps).  Meanwhile, the energy complex never saw the light of day this session, adding further to this week’s already hefty losses as weak oil demand data added to growing recession concerns (gasoline -5.31%, Brent-4.46%, WTI -4.83%).


    And against this backdrop, the front-end of the inflation curves never saw the light of day today, offered at the open and further into close.  Whereas longer tenors gained a little altitude heading into/out of the FOMC decision/presser, only to have much if not all of those gains relinquished into the close - leaving both TIPS breakeven and inflation swaps curves bearishly steeper as the dust settles today.  And with today’s move, one dealer noted that “we will open tomorrow with a steep breakeven curve not really seen since early 2021.”


    In derivatives-space, inflation swap trades on the SDR today included 1y ZC swaps at 225.5bps, 2y ZC swaps at 226.25bps, 225bps 226bps and 227bps, 3y ZC swaps at 231.75bps, 10y ZC swaps at 247.375bps, 248.375bps, and 250.25bps, and 30y ZC swaps at 238.875bps.… (for all of today’s trades, see Total Derivatives SDR, which now also includes information on broker/platform).


    Heading into the final stretch of today’s trade, the 2y breakeven is going out at 202.75bps (-6.875bps), 5y at 216.5bps (-2.875bps), 10y at 219.125bps (-0.5bps) and 30y at 219.375bps (+0.25bps).



    Barclays: Stable in parts, stretched in others – Close short TIIApr27 iota trade

    With the belly of the CPI swaps curve having richened over the past month, strategists at Barclays recommend closing out the TIIApr27 iota trade they recently recommended (see Total Derivatives).  Barclays expounds below:


      ”… The US CPI swap curve has been relatively steady in recent weeks, remains quite flat – especially in contrast to the past several quarters - and is basically unchanged over the past week. Over the past month, however, there has been a modest richening of forwards in the belly of the curve, especially in the 3-5y forward segment. This has pushed the spread between the 1y1y and 2yfwd3y CPI swap forwards to its 94th percentile over the past five years. That said, even with the slight bulge in the belly of the forward curve, the takeaway from CPI swap market pricing is clear, in our opinion, that inflation expectations are well anchored in the mid-to-low 2%s, perhaps with a slight positive inflation risk premium.


      “…In RV terms versus TIPS breakevens, CPI swaps have richened in the 10y sector in particular, pushing iotas in that sector to near three-month wides (Figure 3). For context, the TIIJul32 (off-the-run 10y TIPS) iota is now within 1bp of its widest basis since issuance (32bp), while the TIIJul31 is offering a matched-maturity CPI swap basis of 33bp (88th percentile since issuance) and is simultaneously flashing as cheap across a variety of metrics in the TIPS Rich/Cheap Report.


      “…In the belly of the curve, we close our recommendation to short the TIIApr27 iota at a marginal profit (at least based on mid marks). The trade was initiated in expectation of seasonal fund inflows, incrementally supported by systematic patterns following 5y auctions; with both of those two factors now in the rear view mirror, we are comfortable closing the position. Although performance was not as strong as desired, iotas held in relatively well over the past two months, despite substantial volatility at times, which could potentially be a function of a shifting iota risk/liquidity risk distribution in the TIPS market as investors now expect the Fed to step in aggressively to curtail even nascent signs of Treasury market distress, thereby narrowing the range in which TIPS iotas might trade.”