USD Swaps: Equities drive UST softening; Ceiling talk

Solar panels house 1 Feb 2021
A binary week of trading in major financial markets is set to end on an appropriate note. And would a debt ceiling agreement delay rate cuts?

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  • Equities drive UST softening pre-data

  • DB: Debt ceiling drama may speed up the race to the peak

  • New issues: MDGH 30y Formosa


    Equities drive UST softening pre-data

    A pretty binary week of trading in major financial markets is so far looking to end on an appropriate note as an equities bounce saw USTs lead core sovereign bond yields higher, after a session yesterday where soft PPI and renewed concern about US regional banks saw the opposite move rally USTs. PacWest is +4% and Western Alliance is +2% in pre-market trading today.


    This dynamic may of course be challenged by a healthy dollop of data arriving shortly with the University of Michigan Sentiment index forecast at 63 versus 63.5 in April while inflation expectations are expected to tick down to 4.4% for 1y and 2.9% for 5-10y. Bond bulls will be hoping nothing comes today to contradict the hopeful signs of a soft landing offered by yesterday’s initial jobless claims data which came in at a fresh 2023 high of 264K, above the 245K survey expectation.


    And of course it is the time of year that protracted negotiations about debt ceilings and can kickings flare up to grab headlines. BNP Paribas noted today that “reports late on Thursday indicate that a meeting originally planned for Friday between President Biden and congressional leadership would be postponed until early next week. The parties met Tuesday 9 May with little to show for it. Ultimately, we think the can gets kicked down the road with a short-term agreement, but it may take a more imminent deadline to motivate action.”


    Certainly it seems, the dreaded can will not be rattling the market today. And, because it’s Friday, new issuance is pretty quiet, although not completely dead following the pricing today of a $1.5bn bond issue from Abu Dhabi-based investment giant Mamoura including a $500m 30y Formosa tranche at USTs+135bps via BNPP (B&D), Citi, CA, JPM and StanChart.


    Next week should see a multi-tranche USD (plus a CAD tranche) benchmark bond issue from France’s EDF after this week saw USD supply trail a revived EUR market by some distance.  


    So far today, while the S&P 500 and Dow futures indices bounce by about 0.3%, UST yields are selling off across the curve.  Currently the benchmark 2y is +1bp at 3.91%, 5y is +2bps at 3.38%, 10y is +3bps at 3.41% and 30y is +3bps at 3.76%. While in spreads the 2y is +0.50bps at -7.25ps, 5y is little-changed at -20.25bps, 10y is -0.125bps at -28.5bps and 30y is -71.75bps.



    DB: Debt ceiling drama may speed up the race to the peak

    Strategists at Deutsche Bank ask the question, when will the direction of Fed rate moves start to reverse?


    As evidence to support its view (and the consensus view) that rate hikes are indeed at an end, Deutsche points to core goods prices and labor market pressures,. It said that “Core goods are likely to go in deflation in the months to come. The peak in rents and expected disinflation in core goods leaves services ex-housing as the main component of core inflation which has yet to display a turn. The trajectory for core services ex-housing will ultimately depend on the degree of labor market tightness and wage dynamics.”


    And looking at the broad labor market, Deutsche said that “The quit rate is one of the most reliable indicators of labour market slack. It is now back in its pre-covid range confirming the declining trend in place for a year. It is consistent with further downside to real wages. Wages are not yet at levels consistent with the 2% inflation target, but given that the labour market is a lagging indicator, waiting for the unemployment rate to rise would be too late from a market perspective.”


    In conclusion, Deutsche said that rates should reverse somewhere between August this year and February 2024. It said “The data remains consistent with end-of-cycle dynamics in the US: monetary policy is likely to be tight enough and this is increasingly reflected in the labour market, bank lending and inflation. So far, the US economy has not displayed the sharper moves typical of a recession. But the question is when, rather than if. Seen through the prism of the USD 2s10s curve, the bid/ask is somewhere between a 3m and a 9m forward steepener. Given the historical precedents of debt ceiling negotiations under a divided government, we are positioned for the cycle to end sooner rather than later. The timing may be delayed if the debt ceiling is resolved without a major impact on US fiscal policy.”


    New issues: MDGH 30y Formosa

    • Ohio bottle-maker 0-I Glass is close to pricing $500m 8yNC3 Green bonds via CA, JPM and WFS. Expected 7.375% coupon.


    • Mamoura (MDGH) this morning priced a $1.5bn 2-part ($1bn 10.5y and $500m 30y Formosa). Leads are BNPP (B&D 30y), Citi, FADB, JPM (B&D 10y), StanChart, Barclays, CA, ENBD, Mizuho, Natixis, SMBC and ADCB.  Aa2/AA.  +105bps, +135bps.


    • EIDP Inc. last night launched a $1.2bn ($600m 3y and $600m 10). Leads BofA, GS and SMBC.  A3/A/A. +95bps and +145bps