USD Swaps: USTs pressured as debt-limit deal eyed; 10y TIPS reopening

Bond chart table 30 Jan 2023
USTs have come under renewed pressure as a debt-limit deal is eyed. Sources and JPM preview 10y TIPS reopening.

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  • USTs pressured as debt-limit deal eyed; 10y TIPS reopening

  • Formosas & ZC callables

  • New Issues


    Click here for SDR USD IRS trades.


    USTs pressured as debt-limit deal eyed; 10y TIPS reopening

    News that House Speaker McCarthy finally sees a debt-limit deal coming to the floor for a vote next week as negotiations are in a “much better place” is helping to modestly buoy risk sentiment today (Dow +0.19%, S&P +0.39%, Nasdaq +1.01%).


    And this long-awaited development, as well as today’s batch of stronger-than-expected to consensus data (i.e. jobless claims, Philly Fed, existing home sales, leading index), has put Treasuries under renewed pressure. The benchmark 10y note yield is last another 7.6bps higher at 3.64% while the 2s10s spread is 1.2bps wider at -58.4bps.


    In SOFR-space, red SOFR futures has extended this morning’s selloff and are now 10 to 11.5 ticks softer while SOFR swap spreads are wider across the board amid below-average activity overall, if best seen at the 30y point.  Adding to front end pressures, in Fed speak today, Dallas Fed President Logan (voter) stated that "The data in the coming week could yet show that it is appropriate to skip a meeting. As of today, though, we aren't there yet." 


    In the backdrop, IG issuance is taking a bit of a pause today after over a whopping $57bn has already priced this week (owing largely to Pfizer’s $31bn multi-tranche). Swap spreads are widening, led by the front end, in a likely debt-ceiling relief move. 


    Ahead, Treasury will auction $15bn reopened 10-year TIPS (Jan33s), unchanged in size from the last reopening in March.  And with the front-end of the TIPS market seeing more balance flow after last week’s CPI print (see Total Derivatives ), one dealer felt that this was “a good omen” even further out the curve.  “With the yield selloff of the past couple of days, we expect good demand for the 10y real yield around 1.35% with the breakeven at 223bps,” he continued.


    Similarly, strategists at JP Morgan believe the issue should be taken down with little issue, highlighting the following:


      ”… The March 10-year auction cleared 1.0bp rich to pre-auction levels as end-user demand slumped 3.3%-pts to 89.1%, the lowest since July. Auction allotment data show that investment manager demand declined 9.1%-pts to 64.3%, the lowest level since March 2020, while foreign demand remained robust, rising 5.3%-pts to 23.1%, the highest share since March 2018.


      “…Since the last auction, 10-year real yields have risen 11bp net of carry, though they remain nearly 40bp lower than their local peak in early March. Meanwhile breakevens initially widened before retracing much of the move over the past month and are trading near the middle of their 3-month range. On a relative basis, 10-year breakevens appear close to fairly valued versus commodity prices and credit spreads.


      “…Last week’s CPI report indicated that inflation continues to moderate, with markets focused on the softness in the supercore measure, though the print implies carry should remain highly positive through next month.


      “…Overall, given fair valuations, the recent rise in real yields, and an improvement in risk sentiment given a more positive tone out of Washington, we think (today’s) auction should be digested with relative ease.”


    Currently, SOFR swaps – 2s -9.75bps (+1.125bps), 3s -14.75bps (+1.375bps), 5s -22.25bps (+0.375bps), 7s -29.125bps (+0.25bps), 10s -29bps (+0.75bps), 20s -66.125bps (+0.875bps)*, 30s -71.25bps (+1.125bps).


    * adjusted for 0.2bps roll.



    Formosas & ZC callables

    • JP Morgan sold a $50m 25y NC5 zero coupon callable (non-Formosa). The EMTN matures May 2048 and is callable annually starting May 2028. Self-led. Estimated IRR 4.95%. Announced May 16.


    • Royal Bank of Canada sold a $15m 10y NC5 zero coupon callable (non-Formosa). The EMTN matures May 2033 and is callable annually starting May 2029. Self-led. Estimated IRR 5.125%. Announced May 17.



     New issues

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


    • Korea Credit Guarantee Fund (Aa2/AA) today priced a $300m 3y Social at Treasuries +120bps. Via BNPP.