USD Swaps: Risk on; UST bear flatten; 30y spread views

Options swaps 24 Nov 2021
Equities rose while UST bear flattened. The 20y auction came through 1.1bps. Citigroup and JP Morgan trade views on long end swap spreads.

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  • Equities rise; UST bear flatten; Spread curve steepens

  • JP Morgan and Citigroup on 30y spreads

  • New issues


    Equities rise; UST bear flatten; Spread curve steepens

    Treasuries stayed with a bear flattening into the close, with yields 1.5 to 7bps higher on the day. The 10y note yield is last 3.6bps higher in yield at 3.577%. 2s10s is last 2.2bps flatter at -57.4bps and 5s30s ended 3.8bps lower at 29bps. Meanwhile, equities ended near the highs of the day (DJIA +1.24%, S&P +1.19% and Nasdaq +1.28%). In debt ceiling talks, a narrower round of talks of a small group of staffers were agreed on by both sides.  


    Earlier, the $15bn 20y auction came through the 1pm bid side by 1.1bps, drawing a rate of 3.954%. Directs dropped slightly (18.1%) while indirects rose (70.6%) while primary dealers allocation dropped to 11.3%. The bid-to-cover ratio dropped to 2.56x.


    The swap spread curve steepened versus the underlying flattening with 20y and 30y long end spreads widening on the day while the rest of the curve saw spreads tighten amid mostly lower volumes. On the IG new supply side, a total of $11.85bn priced across eleven issuers, led by a $3bn EDF 3-part and a $2.5bn 2-part from Schwab.  Week to date now stands at just over $60bn – double the expected weekly volume.


    2s -11.5bps (-0.875bps), 3s -16bps (-0.875bps), 5s -22.625bps (-0.875bps), 7s -29.25bps (-0.5bps), 10s -29.875bps (-0.375bps), 20s -66.375bps (+0.5bps), 30s -72.625bps (+0.125bps).



    JP Morgan and Citigroup on 30y spreads

    Analysts at Citigroup think that while “there does appear to be good value in long-end spreads at these levels, although with the possible risk-off backdrop entering debt ceiling,” they “are somewhat hesitant to get long at these levels.” From a valuation perspective, Citigroup finds that “30y spreads remain weighed down by 20y spreads” - which the bank notes “has been the case since the 20y was introduced in May 2020.” Indeed, the bank highlights that “currently 10y20y forward spreads are near the low-end of the multi-year range, which we find puzzling given how well 20y spreads have behaved given the level of volatility following March.”


    Valuation-wise, Citigroup sees “significant room to richen, especially with the buyback backdrop” and it notes that “20y spreads can be one of the few beneficiary points due to the Treasury’ eventual buyback program.” Looking at a regression of 10y20y forward spreads against 10y spreads, Citigroup notes that the levels “are near multi-year cheaps.” Thus, the bank views that “the buyback program should be supportive of both 20y spreads and 30y spreads” but for now Citigroup prefers to wait to get long back-end spreads, but for real money accounts, “who can withstand some volatility, should start taking notice of the back-end.”


    On the other hand, analysts at JP Morgan are biased towards narrowers in the 30y spreads “as debt ceiling fears loom and a risk-off trade becomes more likely.”  In part, this is because 30y swap spreads “exhibit a significant partial beta to swap spreads in the belly,” and the bank expects narrower spreads in intermediate maturities.


    In addition, JP Morgan believes “a simultaneous decline in yields and equity prices that could occur in such a risk off trade would likely result in significant duration needs from Variable Annuity (VA) hedgers” although “on the face of it, the sensitivity of 30y swap spreads to VA duration needs appears modest, with a partial beta of only 0.06 per $1bn 20y equivalents.”


    JP Morgan suggests that this beta “likely underestimates the impact that a sudden jump in receiving needs would have on spreads if it occurs in a short span of time amidst illiquid market conditions” and thus it “biased towards narrower swap spreads in the long end of the curve.”



    New issues  


    • Tokyo plans a USD 3y to 5y through Barclays, Citi, Goldman and MS.


    • Korea Credit Guarantee Fund (Aa2/AA) is preparing a USD 3y Social in the region of Treasuries +155bps. Via BNPP. 


    • EDF launched a $3bn 3-part ($1bn 5y, $1bn 10y and $1bn 30y). Leads BofA, CA-CIB, BNPP, DB, JPM, MIZ, MS, MUFG, SocGen, Santander, StanChart and WFS.  Baa1/BBB/BBB+. +215bps, +270bps, +310bps.


    • Schwab launched a $2.5bn 2-part ($1.2bn 6y NC5 and $1.3bn 11y NC10). Leads BofA, Citi, CS, GS, JPM and WFC.  A2/A-/A.  +205bps, +227bps.


    • Southern California Edison priced a $1.1bn 2-part ($400m 3y and $700m 30y). Leads BMO, Citi, JPM and WFC.  A2/A-/A-.  +112.5bps and +200bps.


    • Southern California Gas priced a $1bn 2-part ($500m 10y and $500m 30y). Leads CIBC, JPM, Santander, Scotia and TD.  Aa3/A+/AA-.  +165bps, +190bps.


    • BlackRock priced a $1.25bn 10y. Leads BofA, HSBC and JPM.  Aa3/AA-. +130bps.


    • ITC priced a $800m 2-part ($300m 5y and $500m 10y). Leads Barclays, GS, MIZ and MS.  Baa2/BBB+.  +135bps and +185bps.


    • BNY Mellon priced a $500m 3y NC2. Leads LOOPCM, SAMRCO, ACADSE, SIEWIL and RSEEL.  Aa2/AA-/AA.  +100bps.


    • CNA Financial priced a $400m 10y. Leads BofA, JPM and WFS.  Baa2/A-/BBB+. +200bps.


    • National Rural Utilities priced a $300m 30y NC5 sub-deal via JPM, MIZ, RBC and TSI.  A3/BBB/BBB+.  7.125%.


    • LYB International Finance III priced a $500m 10y green deal via ING and MS.  Baa2/BBB/BBB.   +205bps.


    • Amcor Finance USA Inc. priced a $500m 10y. Leads BofA, Citi, JPM and WFC.  Baa2/BBB. +217bps.


    • Kommunekredit priced a $1bn 5y. Leads BMO, Daiwa, DB, RBC and SEB. Aaa/AAA. SOFR MS +44bps.


    • Abu Dhabi real estate firm Aldar Investment (Baa1) priced a $500m 10y Green Sukuk. Leads ADCB, ADIB, DIB, ENBD, FADB, HSBC (B&D), Mashreq and StanChart. +150bps.


    • Hungary’s OTP Bank (Baa3/BBB-) priced a $500m 4y NC3 bond. Leads BNP, JPM, MS (B&D), OTP and SocGen. 7.5%.  


    • NRW Bank priced a $1bn 3y. Leads BofA, Citi, Nomura and RBC. Aa1/AA/AAA. SOFR MS +32bps.