USD Swaps: Debt ceiling talks to resume; Spreads wider

Candle chart 12 Aug 2020
Talks on the debt ceiling are due to resume today - banks look at the likely outcomes. Swap spreads widen. A few dollar structures print.

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  • Debt ceiling talks to resume 

  • Callables and Formosas: Merrill Lynch, Deutsche Bank, Rabo, EBRD

  • New issues


Debt ceiling talks to resume 

USTs are a touch steeper with the 30y at 3.94% (+2bps) while SOFRs are a touch softer in the whites and +1 to +3.5 ticks in the reds. Spreads are mostly wider beyond the front end with 2s at -10.50bps (-0.50), 5s at -22.25bps (+0.25), 10s at -27.75bps (+0.25) and 30s at -70.25bps (+0.50). SOFR swap volumes are below average except in the 10y area of the curve.      


LCH SwapClear today confirmed that the clearer's transition from LIBOR to SOFR went smoothly over the weekend (see Total Derivatives).


Ahead, the WSJ says that President Biden and Speaker McCarthy will meet this afternoon to discuss the debt ceiling after their teams returned to talks on Sunday evening. The paper notes that Biden called the House Republicans’ position extreme and unacceptable yesterday although he also said that a call with McCarthy “went well”.


Elsewhere, the Journal reports that Minneapolis Fed President Neel Kashkari said that he was “open to the idea that we can move a bit more slowly from here” with respect to raising rates. Kashkari also told CNBC that "right now it's a close call" although he added the warning that "if we were to skip in June that does not mean we're done with the tightening cycle."   


In the research, Citigroup outlines three potential scenarios for the debt ceiling:


    “1) a straight resolution over the next week or so, with a deal that kicks the can to 2024 or 2025; 2) a temporary deal which kicks the can to after the summer recess; 3) there is no deal, which would force the Treasury to start prioritizing bond payments by skipping other expenditures such as salaries, social security, etc."


    “Over the last several weeks, the market had been priced for some combination of 1 and 2, and currently is priced more for scenario 1. Therefore, the last scenario (3), if it materializes, would have a bigger impact on the curve.”


Citi then sets out its own view of the most likely outcome:


    “Our base case has been, and continues to be, that a deal will be reached before the X-date (which could be June or July, depending on tax receipts in the coming weeks) – i.e. scenario 1. Our 3m2y payer butterfly trade or other equivalent bearish expressions in the front end should do well in this environment based on the idea that rate cuts in the near-term get priced out, as the fog of uncertainty is lifted.


    “However, as mentioned earlier, the market has been moving in this direction over the last couple of sessions, so further sell-offs are likely to be limited, and the focus would turn to economic data.


    “Since the debt ceiling has become a recurring feature every year or couple of years more recently, several of the dates here coincide with the post GFC ZIRP policy regime. Therefore, while there seems to be a persistent pattern of 2s/10s flattening after the resolution, it is worth bearing in mind that the curve was significantly steeper to start with in most of those periods, including in 2011. While the curve initially flattened after the debt ceiling deal in Aug 2019, the 2s/10s curve soon began a cyclical steepening regime as the Fed had started cutting rates. The monetary cycle will likely dominate the curve once the debt ceiling is past.”


Callables and Formsoas: Merrill Lynch, Deutsche Bank, Rabo, EBRD

  • Merrill Lynch sold a $60m fixed callable Formosa 10y NC2. The EMTN matures Jun 2033, is callable annually from Jun 2025 and pays a 5.6% coupon. Leads are Bank of Taiwan, KGI and Yuanta. Announced May 19. 


  • Merrill Lynch sold a $25m 10y CMS-linked Formosa. The EMTN matures Jun 2033 and pays USD 1y CMS + 160bps floored at 0%. Leads are E.Sun and First Commercial. Announced May 22. 


  • Deutsche Bank sold a $80m fixed callable 20y NC5 (non-Formosa). The EMTN matures May 2043, is callable annually from May 2028 and pays a 6.287% coupon. Self-led and announced May 19. 


  • Rabobank sold a $50m zero coupon callable 20y NC5 (non-Formosa). The EMTN matures May 2043, is callable annually from May 2028 and has an estimated IRR of 5.15%. Lead is Deutsche Bank. Announced May 19. 


  • EBRD sold a $25m fixed callable 10y NC2 (non-Formosa). The GMTN matures Jun 2033, is callable annually from Jun 2025 and pays a 4.95% coupon. Lead is WFS and announced May 19.  


New issues

  • Tokyo (A+) plans a $500m 3y at around swaps +90bps  through Barclays, Citi, Goldman and MS (B&D). Expected to price Tuesday.


  • NedWatershcaps plans a $1bn 5y Social in the region of swaps +47bpps. Leads are Barclays, BNPP, CIBC and Citi.   


  • Korea’s Kubota Credit Corp (A) is preparing a USD 3y bond through BofA, Barclays, MS and Nomura after meeting investors from May 22.