USD Swaps: Banks slip; Debt ceiling talk

US Treasury 9 Jun 2022
UST yields are lower ahead of CPI later this week. Regional banks are down a touch, while meetings over the debt limit kick-off with low expectations.

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  • Yields, banks both down small

  • DB: What next for the debt limit deadlock? 

  • Callables and Formosas

  • New issues


    Yields, banks both down small

    Treasury yields are 1-2bps lower and spreads are tighter again as the market digests recent issuance and awaits news on the debt limit (see below). Among the banks, following a fleeting bounce PacWest is off the lows but still -7% in pre-market trading, while Western Alliance is -2% and the Euro Stoxx Banks index is -1.1%. However, UK bank shares are in the green and S&P futures are only -0.4%.


    The market moves seem to be reflected in the views of one swapper yesterday. "What is the systemic risk of regional banks?” they wondered. “In the GFC, you had the largest institutional banks in trouble and that is systemic risk” but with the regional banks this time around you are taking out “the bad actors and management” with no one  bailing them out. Still, even this participant accepted the potent headline risks driving daily risky asset moves.


    In the news, the WSJ previews (link) today's key debt-ceiling meeting. It concludes gloomily that expectations are "set low" with Biden and congressional leaders "planning to reiterate their already-hardened positions, according to aides.” The WSJ adds that, “some Biden administration officials increasingly see a short-term extension of the debt limit until later into the summer as the most likely option for reaching an agreement with House Republicans in the coming weeks. That could allow for further talks over spending.”


    Swap spreads are another 0.25-0.50bps tighter across much of the curve after the recent surge in issuance (also seen with US names launching reverse yankee deals in euros, see Total Derivatives) with 2s at 5.50bps (-0.25), 5s at -19.75bps (-0.25), 10s at -28.00bps (-0.50) and 30s at -71.75bps (-0.50).  Outright SOFR volumes are mostly below par except in the 3y and 10y areas of the curve.  


    Ahead, Fedspeak ahead of the CPI data tomorrow includes Jefferson and Williams today, while Treasury will sell $40bn in 3y notes. The NSA CPI fixing traded yesterday at 4.99154% (303.54) according to the SDR, a touch above the 303.491 Bloomberg survey consensus. Short-dated TIPS breakevens are 1-3bps lower in early trading, with WTI down 65 cents.


    DB: What next for the debt limit deadlock?

    Ahead of today’s meetings between the White House and Congressional leaders, what are the potential ways through the debt limit deadlock? With US 5y CDS indicated at around 75bps today and close to recent wides, Deutsche Bank runs through some of the possible scenarios.


    First, it sets out the key political and cash flow dates, as it sees them:


    • May 26: House recess

    • June 1: The earliest possible date Yellen warned about a U.S. default, though DB reckons the Treasury has “a tendency to be conservative”

    • June 5-23: Congressional session

    • June 15: Quarterly corporate tax payments will determine the additional runway for rest of summer; IRS’s payment deferral relief for certain counties in California and Alabama create some uncertainties

    • June 30: Extraordinary measures gets a one-time increase by as much as $143bn

    • July 10-28: Congressional session

    • July 15-31: DB expects Treasury to most likely run out of cash and extraordinary measures during this period

    • August 1: Large federal payments due on first of the month likely “makes this the deadline for negotiations,” according to DB

    • September 11-29:  Congressional session


    Second, the bank mulls the timing for a possible resolution and assesses the likelihood of the dates:


    • Deal before June 1 (10% probability): “Yellen sticks to June 1 deadline forcing rapid progress on negotiations.”

    • Deal in mid-June/mid-July (30%): “Yellen indicates additional room beyond June 1 and / or rapid progress is  made in coming weeks, but time needed to hammer out details.

    • Deal before September 30 (50%): “Progress is slow, Congress votes for short-term extension to couple the debt  limit fight with the added risk of a government shutdown

    • Deal beyond September 30 (10%): “Congress votes for a further short-term extension and continuing spending  resolution to finalize a deal”


    Third, and finally, it asks what a deal (or no deal) could look like:


    • 90% probability: ”Democrats agree to modest spending cuts in the FY 2024 budget in exchange for a debt limit raise through 4Q 2024 or beyond”

    • 8% probability: ”The Biden Administration invokes the 14th Amendment…The potential for a constitutional crisis rises meaningfully”

    • 2% probability: “Default - Neither side backs down from their positions and both parties refuse  to vote on even a short-term suspension”


    Callables and Formosas

    • AFDB sold a $50m 20y NC5 zero coupon callable (non-Formosa). The EMTN matures May 2053, is callable annually from May 2028 and has an estimated IRR of 4.78% (CORRECTS). Lead is JPM and announced May 9.


    • Credit Agricole sold a $30m 10y NC3 fixed callable (non-Formosa). The EMTN matures May 2033, is callable annually from May 2026 and pays a 5.26% coupon. Self-led and announced May 9.


    New issues

    • Export-Import Bank of China (A1/A+) plans a $1.5bn 3y at Treasuries +35bps. Leads are BoC, Bank of Comms, Barclays, CITIC, CA (B&D), HSBC, ICBC and MUFG.   


    • Singapore’s Bayfront Infrastructure (Aaa/AAA) is preparing a USD 3y at Treasuries +55bps via HSBC and StanChart.


    • Merck & Co yesterday priced a $6bn 6-part ($500m 5y, $750m 7y, $1.5bn 10y , $750m 21y, $1.5bn 30y and $1bn 40y). Leads are BNPP, Citi, JPM and MS. A1/A+. +57bps, +82bps, +100bps, +102bps, +120bps and +135bps.


    • Oncor Electric Delivery yesterday priced a $1bn 2-part ($600m 5y and $400m reopening of its 4.95% Sep 2052). Leads are Citi, JPM, TD and USB. A2/A+. +85bps and +145bps.