USD Swaps: Bulls twitchy as slowdown too slow

Traders said that the level of 3.65% in 10-years is where buyers will now consider buying 10y USTs as bulls endure a twitchy week.

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  • Bulls twitchy as slowdown too slow

  • Deutsche: Recession to strike by year-end?

  • Callables and Formosas: KfW


    Bulls twitchy as slowdown too slow

    Maybe its one of those numbers that, beneath the technical trading mumbo-jumbo, people have been targeting because it’s an iconic number in its own right. There are 365 days in a year and UST traders today said that 3.65% (in 10y) has become the short-term safe place where UST bears, nervous bulls and agnostics can gather together.


    “Flow overnight (in Asian trading) and this morning (in London) have been very light,” said one senior USD fixed income trader today, but what we did see was selling out of the Far East as (the 10y yield) approached 3.60% which seemed content when it hit 3.65%.”


    After as relatively subdued week that has seen 10y USTs rise in a gentle, but straight line, by 20bps, and US economic data has been marginally weak, but nothing more than that, the above trader said he believes USTs have parked themselves at a place where everyone can take a breather and ask themselves ‘where exactly do we go from here?’


    The trader said that “when you’ve got 5y IRS at 3.5%, or indeed 5y UST yields at 3.75%, and the overnight rate at 5.10% that’s unsustainable, something’s got to give. So the longer northing happens in terms of a significant dip in data, especially inflation, the more the market will lean towards selling off when all other things are equal, which is what we’ve seen this week.”


    “Overnight the market didn’t get going until that 10y yield was pushed up to 3.65% because at the moment that’s where the buyers want it.  But how long that will last depends on what happens next week,” specifically in terms of US data, which doesn’t really get going until PMIs come out on Tuesday.  


    Looking at the price action over the last couple of days the trader was quick to point out the upwards pressure on yields from the whopping $31bn bond issue (the fourth largest USD corporate bond sale in history) from Pfizer, and slightly hawkish comments from Dallas Fed Chief Lorie Logan yesterday. Logan said the economy “is a long way” away from the 2% inflation target and that June is too early to stop hiking.


    “She is very well respected but because of all the noise about the debt ceiling it took a while for her words yesterday to be listened to,” said the above trader. “The data needs to be a lot worse than it is to justify market pricing but (since Logan’s comments) it is now pricing 10bps of hike in for June,” noted the trader.


    With issuance fully drained after a busy week and markets generally becalmed by an unofficial four-day weekend in major parts of mainland Europe today, flows and volatility have both been running art low levels, ahead what may be a more decisive week of mood setting in the five days to come.


    Currently the 10y yield is at 3.69% having touched 3.615% overnight and after closing yesterday at 3.649%. The 2s/10s curve is unchanged while 10s/30s has bear-flattened by 1bp. In swap spreads the 2y is currently +0.5bps at -9.5bps, 5y is unchanged at -22bps, 10y is +0.25bps at -28.5bps and 30y is little changed at -71.125bps.


    Deutsche: Recession to strike by year-end?

    While some fixed income traders are clearly tired of waiting for the slowdown that never quite turns up, strategists at Deutsche insist that any questions regarding a full-on US recession surround the issue of ‘when’ not ‘if.’


    In research published this week, Deutsche points to the latest Bloomberg survey of 65 bank economists  which shows that “consensus (68%) is now expecting a US recession… given that economists’ models rarely predict a recession this speaks volumes about the direction of travel… Whenever the Fed have previously hiked this fast, a recession has followed within months.”


    Looking at market indicators, Deutsche asserts that “Historically, the 2s10s yield curve (currently -53bps) inversion is the most reliable indicator of recessions… usually occurs around 12-18 months later. The ‘3-month rule’ (that inversion needs to stick for 3 months before it counts)  tightens up the gap between US 2s10s inversion and recession to 8-19 months. That takes us to March ‘23 - February ‘24. Exception is dovish Fed policy error of mid-60s.”


    And looking at alternatives to its own favoured recession indicator, Deutsche said “Fed officials said last year that the near-term forward spread is a better recession indicator… but that’s now inverted by nearly 200bps!”


    And while other big economic signposts, particularly NFP are proving sticky, Deutsche concludes that “Whilst payrolls are still rising, the temporary help services category is falling, and that leads the cycle… declines on this scale have always been associated with recessions before. Excess savings have prevented us from accelerating our US recession call over the last 18 months. We’ve held it at H2 2023 since early 2024. However these are likely to be eroded by year-end which fits in with the timing of other lead indicators.”


    Callables and Formosas: KfW

    • KfW sold a $50m 20y NC4 fixed callable (non-Formosa) 4.612% due May 2043. Callable once in May 2027. Lead is JPM and announced May 19.