USD Swaps: UofM inflation expectations flare; FDIC impact on funding markets

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UofM inflation expectations flare; FDIC impact on funding markets

News that consumers expect long term prices to rise at the highest pace in over a decade (i.e. Michigan 5-10y inflation expectation +3.2% versus +2.9% Bloomberg consensus) has served as an accelerant for this morning’s nascent sell-off in the rates market - leaving this week’s warmly received CPI and PPI prints a distance memory. 

Indeed, the benchmark 2y note yield is now 9.6bps higher at 3.996% while the 2s10s spread is 3.7bps narrower at -55.4bps in the mid-afternoon trade today.  Meanwhile, in the SOFR trading pits, red SOFR futures are currently 10.5 to 11 ticks softer while SOFR swaps spreads are lightly offered across the board amid below average activity in all but the 2y and 30y tenors today. 

In the backdrop, after a couple of IG issuers moved to the sidelines yesterday due to shaky credit conditions, two companies have come forward with new deals today (i.e. Mamoura and Honeywell) – marking the second consecutive Friday that syndicate desks have floated deals into the market. 

Notably, today’s IG deals have forged through despite the rosiest of risk backdrops (Dow -0.44%, S&P -0.49%, Nasdaq -0.76%) after Treasury Secretary Yellen reiterated that a default would be “an economic and financial catastrophe,” while Fed Governor Bowman warned that the Fed will likely need to raise interest rates further and keep them higher for some time if inflation remains stubbornly high.

Elsewhere, the FDIC announced yesterday that to recover an anticipated $15.8bn cost of the three recent bank failures, it is proposing for public comment a plan to recover the cost by assessing a special quarterly fee on banks that hold large amounts of uninsured deposits. The proposal would assess a fee of 12.5bps per year for 2 years on the uninsured deposits above $5bn, likely starting with a first quarterly payment on June 30, 2024 if the proposal is adopted as is.

According to a statement made by FDIC Chair Martin Gruenberg: "As proposed, it is estimated that a total of 113 banking organizations would be subject to the special assessment. Banking organizations with total assets over $50 billion would pay more than 95 percent of the special assessment.  No banking organizations with total assets under $5 billion would be subject to the special assessment."

Strategists at BofA note that “this special assessment is required under the Federal Insurance Deposit Act and was triggered by the systemic risk determination that allowed uninsured depositors to be guaranteed in the 3 closed banks.”  But digging further into the ramifications of the proposal, BofA assesses the potential impact on funding markets and suggests that the impact should be “limited”.  The bank expounds below:

”…In general, FDIC assessment is somewhat akin to SLR (supplementary leverage ratio) in that it requires an amount of capital set aside, held at the FDIC, based on the size of liabilities, in this case uninsured deposits, but more generally total liabilities. This is a risk-insensitive capital requirement based on a balance sheet size metric like a leverage ratio requirement. FDIC charges are generally a disincentive for insured banks to expand their balance sheet for relatively small profit gains that do not offset the total size-based capital needs.

 

“…The standing FDIC surcharge & SLR requirement are key reasons why domestic banks have largely stopped opportunistically borrowing in the fed funds or repo markets (i.e. borrow in FF or repo and deposit at Fed's IOR rate). This activity is now primarily concentrated within foreign banks who do not pay for FDIC insurance and/or have more favorable SLR rules from their home regulator.

 

“…Banks subject to the FDIC surcharge are not active players in this FF/repo arbitrage. Therefore, the new FDIC assessment is unlikely to have a material impact on current FF or repo dynamics. In theory, if FDIC assessments rise more broadly, it could put some downward pressure on FF or repo to attract continued overnight borrowing in FF and repo to place at IOR. In practice, this seems unlikely due to limited money market arb presence of impacted FDIC insured banks. To the extent that there are some FDIC-insured actors in this spread market, higher barriers to trade could widen the spread to IOR slightly.”

Currently, SOFR swaps -  2s -8.5bps (-0.5bps), 3s -13.625bps (-1bps), 5s -20.75bps (-0.5bps), 7s -28.125bps (-0.875bps), 10s -28.75bps (-0.5bps), 20s -66.375bps (-1bps), 30s -72.5bps (-0.75bps)*.

* adjusted for the 0.125bps give. 

 New issues

• Honeywell launched a $750m 5y and $1bn 10y benchmark via BofA, Citi, JPM, SBMC and WFS.  A2/A/A.  Launched at +85bps, +115bps.

   

• 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.