USD Swaps: Never ending bank angst; Following the money again

Wall street stocks Oct 2022
Regional banking angst crept back into the narrative and remained there today, leaving USTs steeper. BofA follows flows in banking system.

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  • Never ending bank angst; Following the money again

  • New Issues


    Click here for SDR USD IRS trades.


    Never ending bank angst; Following the money again

    Despite the Fed’s recent soft “mia culpa” and re-assurance just yesterday that conditions in the U.S. banking sector have “broadly improved” and that the banking system is “sound and resilient”, concerns about regional banks remained front and center today.   


    Indeed, despite refuting FT claims that it was considering a potential sale of all or parts of its business, Western Alliance Bancorporation remained under the gun today with its share tumbling another 38% - only to be outdone by Pac West shares which fell an additional 50%.  And once again this continued chaos and uncertainty spoiled the mood in the broader markets that saw all the major domestic equity indices on the ropes today yet again – but ending well off their earlier lows (Dow -0.86%, S&P -0.792, Nasdaq -0.49%).


    Similarly, Treasury yields are ending off their earlier lows but with today’s steepening remaining intact as the front-end continued to outperform.  The benchmark 2y note yield is last 3.5bps lower at 3.77% after hitting a low water mark of 3.6526% late morning while the 2s10s spread is last 6.5bps wider at -40.6bps. 


    Meanwhile, swap spreads remained narrower today after widening post-FOMC, with wings leading the contraction amid below average activity in all but the 2y and 7y tenors this session.  IG new issuance remained sidelined amid the unstable credit conditions with only two issuers coming forward today.


    Elsewhere, with banking concerns still serving as a thorn in the markets’ side, strategists at BofA once again updated their analysis of how money is moving around in the U.S. financial system and what this implies for bank stress.  Below, BofA provides its real-time assessment of how funds are flowing in the system using daily & weekly data across FHLBs, MMF, & Fed as of today (May 4th): 


      ”… Key takeaway: banking system stress remains elevated & there are ongoing concerns around certain banks. Negative bank headlines do not appear to be spilling over into demand for FHLB advances this week as FHLB debt is down $9b. However, FHLB loans have increased from start of last week. Fed H.4.1 data will likely show shifts in borrowing due to First Republic acquisition; we will watch for any additional signs of stress. MMFs continue to see inflows but this is not being reflected in ON RRP take-up.


      “…FHLB activity: FHLB OF published official debt issuance figures for April earlier this week, which showed FHLB debt grew $12b on the month, a significant slowdown from the $247b increase in March. According to our estimates, FHLB issuance picked up in the last week of April (+$38b) but has since reversed, totaling $9b in net paydowns WTD. Market color from FHLBs noted a broad range of reasons for last week's higher issuance, including advances to banks, pre-funding, and precautionary funding. This was likely preempted by bank earnings and negative headlines.


      “…Money market funds: According to Crane data, MMF AUM increased $65b WoW, primarily into gov't institutional funds (Exhibit 6). Gov't institutional MMF AUM is now $298b higher than levels seen on March 10th.


      “…ON RRP: take-up declined $9bn on Wednesday, but still $70b higher since March 10 (Exhibit 8). Despite MMF inflows, ON RRP take-up has not increased to the same degree, likely due to FHLB issuance and some gov't MMFs unable to invest in repo.


      We expect MMF take-up at the ON RRP to increase heading into the X-date as MMFs typically want to avoid bills maturing following projected X-dates. We recently updated our bill supply projections but continue to forecast a large wave post debt limit resolution which will likely pull money out of ON RRP.


      “…Fed data: Fed H.8 data for the week ending April 19th showed domestic bank balance sheets declined $118b, stemming from cash on the asset side and deposits on the liabilities side. This corresponds with a $183b fall in reserves which continued to decline by $33b the following week. The decline in reserves is supported by a $210b build in TGA (4/12 - 4/26) due to April tax receipts.”


    Currently, SOFR swaps – 2s -3.625bps (-1.875bps), 3s -12.875bps (-1.5bps), 5s -18.375bps (-0.75bps), 7s -24.625bps (-0.625bps), 10s -26.125bps (-1.5bps), 20s -61.75bps (-1.25bps), 30s -69.125bps (-1.75bps).



    New issues

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


    • Boston Properties priced a $750m 10y Green. Leads BNYM, JPM, MS and WFC. Baa1/BBB+. Priced at +320bps.


    • Blackstone buyout vehicle Copeland (Emerson Climate, Emerald Debt Merger) (Ba3/BB-/BB+) priced a $2.275bn long 7y NC3 and $455m EUR equivalent long 7y NC3 secured bonds. Leads are Barclays (B&D), BofA, BNPP, CIBC, FITB, GS, HSBC, JPM, Mizuho, MUFG, REGSOL, RBC, Scotia, SMBC, TorDom, TSI, USB and WFS.  Priced at 6.625% and 6.375%, respectively.