USD Swaps: Issuance awakens; Citi eyes 2y spread storm

Herding wildebeest 10 Jun 2020
Last week ended with a glut of EUR-denominated cross-border bond issuance, today the dollar is striking back. Citi eyes 2y spread storm.

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  • Issuance awakens as spreads under pressure

  • Citi: 2-year spread storm could get worse

  • New issues


Issuance awakens as spreads under pressure

Last week ended with a glut of EUR-denominated cross-border bond issuance, opposed on the other side of the Atlantic by just a small band of hardy USD issuers, led by the likes of BNG with its $1.5bn, 5y deal on Thursday.


Today the USD is fighting back. Significant deals are imminent from big names including CADES, Council of Europe, Tokyo, JICA and Westpac, as the vagaries of the basis swaps market spur both supply and demand.


In addition to these likely currency-swapped deals, there is heavy domestic supply rolling into town including a behemoth from Pfizer in the form of a 2y to 40y multi-tranche senior secured bond offering to raise funds to aid its $43bn purchase (including an expected $31bn of long-term debt) of biotech company Seagen.


However, Pfizer’s most recent annual report suggests the issuer prefers not to swap its bond issuance, with only $2.25bn (notional) in IRS at the end of 2022. Still, swap spreads have tightened across the board this morning, by -0.50bps to -8.75bps in 2y, -0.50bps to -21.00bps in 5y, -0.25bps to -29.00bps in 10y and -0.50bps to -72.75bps in 30y.


Elsewhere today, 10y UST yields were +4bps at 3.50% despite the Empire State Manufacturing survey which, even by its own volatile standards, was a bit of a shocker, coming in at -31.8 in May versus a forecast of -3.9 and an April headline of +10.8. The curve is a touch steeper and SOFRs are 0.5-1 tick firmer in the reds.


Generally core bond markets are a little softer today while equity markets are off pre-open highs as the market waits for the latest themes to emerge. In the US, the week's Fed talk kicked off today with Atlanta Fed President Bostic saying on CNBC a short while ago that “My baseline case is we won’t really be thinking about cutting until well into 2024,” citing, of course, still rampant inflation while the Chicago Fed's Goolsbee warned that the impact of past rate hikes was "still to come".


Citi: 2-year spread storm could get worse

Strategists at Citigroup this week took a look at swap spreads in the front end of the curve, focusing particularly on the large cheapening in 2y spreads over the past two weeks. It reckons 2y spreads have cheapened due to a "perfect storm" from the following and while it recommends taking profit on 2y spread shorts, it warns that spreads can continue to cheapen:


  • Market coalescing around an earlier X-date. "After tax season, we warned that receipts came in even lower than our weak expectations, putting a risk at early June, although our base case was late July/August. Since then, receipts have remained weak, and refunds have processed in line with 2022, which has made an early June X-date much more probable. The earlier the X-date then the quicker T-bill supply can hit the market, which is one reason SOFR is now being priced to move higher, relative to FFs, than a few weeks ago."


  • Expectation that banks could sell paper. "In March, there was a large sale of USTs by banks based on the H8 dataset (~$60bn). We think there is a growing expectation that banks could: 1) sell front-end paper to raise liquidity; and 2) shift out of cheapening front-end ASWs and into longer-dated ASW. Even if this is just the market’s expectation, and has not realized yet, it may be adding to downside pressure in spreads."


  • Pressure in repo markets to be a feature going forward. "We’ve long warned that repo rates are poised to move higher in 2023. In the past few weeks, volumes have increased, although less so the last few days… Still, volumes are likely to keep growing, both as T-bill supply increases after the debt ceiling and QT continues to shift Treasuries from the Fed’s balance sheet to private hands each month. We still see SOFR trading 2-4bp above FFs as the year progresses."


In conclusion, Citi said that “We think ‘fair’ could range anywhere from -10bp to -20bp, depending on how RRP usage plays out. To be clear, these levels are for year-end, assuming the TGA is rebuilt to $600bn to $700bn, T-bill outstanding has moved back to over $5tn, and QT continues through YE23. Still, we do not think 2y spreads would reach -15bp to -20bp in the very short-run. Given the abundance of funds in the RRP facility, we don’t see valuations falling back to -20bp to -30bp until RRP is closer to fully drained.”


New issues:

  • Pfizer has mandated BofA, Citi, Goldman and JPM to lead a multi-tranche USD-denominated bond issue in 2025, 2026, 2028, 2030, 2033, 2043, 2053 and 2063 maturities to help fund its $43bn purchase of Seagen.


  • Westpac plans a 5y Covered Bond at swaps +97bps or so via HSBC, Lloyds, RBC, TorDom and Westpac. Expected today.


  • CADES plans a USD benchmark 5y bond at swaps +47bps via BNPP, Goldman, NatWest and SocGen.


  • Tokyo Metropolitan Government has mandated Barclays, Goldman, Citi and MS to arrange investor chats from tomorrow ahead of a planned 3y to 5y USD bond issue.


  • Japan International Cooperation Agency plans a USD 5y Sustainable Bond issue via Barclays, Citi, Daiwa and MS. Expected tomorrow at around swaps +80bps.


  • Toyota Motor Credit plans a three-tranche USD deal consisting of 3y, 3y FRN and 7y via CA, JPM, MS, SocGen and TorDom.  


  • Southern Co plans a USD 5y at around USTGs +162bps, and 10y at +195bps via Barclays, MUFG, RBC, UBS and WFG.


  • Poland’s BGK plans a $1.5bn 10y USD-denominated government-guaranteed COVID-19 Response Bond via BNPP, Citi, ING, JPM and Santander. Price talk around USTs +200bps.


  • Weyerhauser plans a USD 3y bond at around USTs +140bps via GS, JPM, MUFG, MS and Scotia.


  • CofE Development Bank plans a 3y USD Social Bond at SOFR +24bps or so via CA, MS, NatWest and Nomura.


  • Saudi Arabia plans a two tranche, USD denominated Sukuk in 6y at around USTs +110bps and in 10y at around +135bps.