USD Swaps: Flatter and wider; Ceiling; Brevan long increased

US Treasury 9 Nov 2020
Treasuries are bear-flattening again with spreads wider led by the belly. Brevan moved longer last month.

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  • Flatter and wider as 30y hits 4%

  • Brevan increased DV01 long, FX risk in April

  • New issues


Flatter and wider as 30y hits 4%

Renewed bear-flattening has seen SOFRs lose up to 9 ticks in the reds while 2s/10s is 4bps flatter. Even so, the 10y is testing the top of the day’s range at 3.76% (+4bps) while 30y is at 4% (+3bps) for the first time in a couple of months. At the same time, S&P futures are edging into the red as the market awaits the PMIs, news on the debt ceiling and the $42bn 2y auction, while swap spreads are mostly wider with 2s at -11.125bps (-0.25), 5s at -21.50bps (+0.50), 10s at -27.00bps (+0.75) and 30s at -69.75bps (+0.50). IRS flows are mixed and above-average in the long end.        


The press reviews yesterday’s debt ceiling talks with the NY Times concluding that Biden and McCarthy remained “far apart” on a deal even as both sides made optimistic but non-committal noises in public (“productive,” “can get it done” etc). The WSJ reports that McCarthy warned that a deal "must be reached this week to have time for the legislation to pass Congress” ahead of the recess.


Elsewhere, Deutsche Bank has updated its views and probabilities on the outlook for the ceiling:


    “We maintain early June as our base case for X-date and project that the Treasury will most likely run out of cash during the week of June 5.


    “Both sides in the debt negotiations struck a more constructive tone last week, although genuine stumbling blocks remain in place. The odds of a full resolution have shifted higher, and the pricing of default risk in T-bill and CDS markets has declined correspondingly.


    “Our updated views are: 45% probability of a resolution by June, 45% probability of a short-term extension to September, 8% probability of no action by Congress resulting in Biden invoking the use of the 14th amendment, and 2% probability of an outright Treasury default.


    “We expect positive market reactions to an announcement of full resolution, with our baseline  entailing ~2% higher in the S&P and ~10bp higher in the 10Y yield…We forecast $750bn in net bill issuance post a June resolution.”


Brevan increased DV01 long, FX risk in April

Brevan Howard’s $11bn Master Fund increased its DV01 long at the end of April compared with a month earlier, despite losing -0.91% in April to leave the fund down -4.25% for the year to date.


The Master Fund ended last month still flat EUR rates across the curve, long the 10y+ area of USD, went from flat to long 2y GBP, and remained short 10y+ JPY. Most of the positions were relatively small DV01s. In the background, 10y Treasury yields fell by 4.5bps in April after plunging by 45bps in March (when the Master Fund had a big -4.18% drawdown).


Echoing the rise in the fund’s net DV01 long last month, the Master Fund’s interest rate VaR (95%) picked-up to $30.3m in April from $24.2m at the end of March, although its interest rate vega exposure edged down a touch to 0.29% of NAV from 0.34%.


Across other asset classes, the Master Fund increased its long in European currencies along with an Asian currency short. Its FX VaR also rose sharply for the second month in a row, to $28.7m in April from $14.5m at the end of March. Of that FX VaR, more is now in GBP FX risk than USD. Note that the pound rose by 1.9% against the dollar and 0.3% against the euro in April but has more recently fallen back versus the dollar from the peaks hit in early May.


The Master Fund turned small long equities and remained small long commodities, credit and digital assets.       


Weekly data from Brevan Howard feeder fund BH Macro suggests that the Master Fund continued to find the going tough as yields rose and sterling fell this month with the fund’s NAV basically flat at +0.04% for the month to May 12. That gave a loss of -3.97% for BH Macro for the year to date, most of which arrived in March’s SVB turmoil.


New issues

  • KfW plans a USD 5y Global at around swaps +36bps. Leads are BMO, Citi and GS.


  • Tokyo (A+) has launched a $500m 3y at swaps +84bps  through Barclays, Citi, Goldman and MS (B&D).


  • NedWatershcaps plans a $1bn 5y Social bond at swaps +45bpps. Leads are Barclays, BNPP, CIBC and Citi.   


  • Seagate HDD (BB) is preparing $1bn in 6.5y NC3 and 8y NC3 bonds. Leads are BofA, BNS, BNPP, MS, MUFG and WFS.  


  • Korea’s Kubota Credit Corp (A) is preparing a USD 3y bond at around Treasuries +92.5bps through BofA, Barclays, MS and Nomura. 


  • China Construction Bank (CCB) Sydney (A1/A) plans a USD 3y Green at around Treasuries +55bps. Leads are ABC, BOC, Bank of Comms, CCB, Citi and CA.  


  • Malaysian sovereign wealth fund Khazanah (A3/A-) plans USD 5y and 10y Sukuk and/or conventional bonds after meeting investors from May 23. Leads are BofA, CIMB, DBS, JPM, Maybank, MUFG and OCBC.   


  • UAE’s MAF (BBB) is preparing a $500m 10y Green Sukuk in the region of Treasuries +175bps. Leads are ADCB, ADIB, Citi, DUBAII, FAB, HSBC (B&D) and StanChart.  


  • Saudi Fransi plans a USD 5y Sukuk at around Treasuries +130bps. Leads are Citi, FAB, GS, HSBC (B&D), Mizuho and SFCAPI.