USD Swaps: CPI hits the bulls-eye; Concession needed for 10y auction?

Target hit darts 17 Jan 2023
April CPI was broadly in line with consensus, if not a touch softer, with USTs bull steepening in its wake. Concession needed for 10y auction?

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  • CPI hits the bulls-eye; Concession needed for 10y auction?

  • Formosas and ZC callables

  • New Issues


    Click here for SDR USD IRS trades.


    CPI hits the bulls-eye; Concession needed for 10y auction?

    Markets are taking a collective sigh of relief today as this morning’s April CPI report was broadly in line with expectations, or even a touch softer than expectation at the margin.  


    To be sure, headline CPI came in at +0.4% MoM/+4.9% YoY (versus Bloomberg consensus of +0.4% MoM/+5% YoY) while core came in as expected at +0.4% MoM/+5.54% YoY.  Meanwhile, the NSA came in a tad softer than expected at 303.363, compared to consensus of 303.5 and a fixing market in the screens of 303.54. 


    Reflecting on what today’s print may mean for Fed policy going forward, strategists at BofA surmise the following:


      ”…In our view, this is an encouraging print for the Fed. Broad-based deceleration, and concerns about used cars offset by the fact that wholesale prices are falling again. This report should keep the Fed comfortable with a hold in June. However, note that we have one more jobs report and one more inflation print before the June meeting.”


    And in similar vein, following the print, the market is now pricing a slimmer probability of a hike in June and sharper cuts into the second half of 2023.  Indeed, implied OIS now reflects about 5bps of a hike in June and implies about 70bps of cuts through December.  Meanwhile, Treasury yield have dropped 3-9bps today with the benchmark 10y note yield down 6.5bps at 3.454% while the 2s10s spread is 1.25bps wider at -49.5bps. 


    In SOFR-space, red SOFR futures are currently 10 to 10.5 ticks firmer while SOFR swap spreads are mostly wider amid below average activity in all bet the 2y, 3y and 5y tenors.  In the backdrop, a light flurry of IG deals hit the tape after the CPI was hurdled with BNG Bank a likely swap candidate at the 5y point today.


    Ahead, Treasury will kick off the second leg of this week’s refunding with today’s $35bn 10y note auction, unchanged in size from the previous new issue auction in February, after yesterday’s $40bn 3y note auction received a very strong reception (see Total Derivatives).  Heading into today’s supply, strategists at JP Morgan believe that a little more of a concession may be needed for a smooth landing today.  The bank highlights the following:


      ”…The April 10-year auction cleared at 3.455%, 1.8bp cheap to pre-auction levels as end-user demand remained at a muted 82.9%, with foreign demand declining 1.3%-pts to 11.7%, while investment manager demand rose 1.8%-pts to 68%.


      “…Since the last auction 10-year yields have risen by 7bp . During this period, intermediate yields have nearly halved the gap to their model-implied levels, but remain roughly 17bp too low after adjusting for market-based Fed, inflation, and growth expectations.


      “…Meanwhile the sector looks fairly valued on the wings after adjusting for rate levels and curve. Importantly, positioning is starting to appear somewhat stretched to the long side, as our Treasury Client Survey published (yesterday) shows that our clients are the most long since March 2020.


      “…Given rich valuations and long positioning, we think (today's) auction will require a further concession in order to be digested.”


    Currently, SOFR swaps – 2s -7.25bps (-0.625bps), 3s -11.125bps (+0.75bps)*, 5s -19.5bps (+0.5bps), 7s -26.25bps (+0.375bps), 10s -64.25bps (+0.5bps), 20s -64.375bps (+0.5bps), 30s -71.5bps (+0.5bps).


    * adjusted for the 3bps give.



    Formosas and ZC callables


    • Morgan Stanley sold a $20m 10y fixed callable Formosa. The EMTN matures May 2023, is callable annually starting May 2028 and pays a 5.21% coupon. Leads Shanghai Commercial and Yuanta and announced May 9.


    • National Bank of Canada sold a $10m 5y floating Formosa. The EMTN matures May 2028, is not callable and pays O/N SOFR +1.2%. Lead KGI and announced May 10.



    New issues 


    • Willis North America is working on 10y benchmark via BofA, Barclays and PNC.  Baa3/BBB+.  Price talk: +220bps area.


    • Edison International is working on a 5y benchmark via MUFG, MIZ and PNC.  Baa2/BBB-/BBB.  Price talk: +220bps area.


    • Ryder is working on a 5y benchmark via MUFG, MS, PNC, USB and WFC.  Baa2/BBB+/BBB+.  Price talk: +205bps area.


    • BNG Bank is working on a 5y social bond via CA-CIB, Citi, Daiwa and RBC.  Aaa/AAA/AAA.  Price talk: MS + 48bps area.


    • Foundry JV Holdco LLC is working on a 10y deal via BNPP, BMO, SMBC, TD and WFS.  A3/A-.  Price talk: +275bps area.