USD Swaps: Risk off vibes; USTs gain; 2y goes through

Fluid dynamics 1 26 May 2022
Equities ended in the red and USTs rallied off the lows. The 2y auction sees ample demand and went 2bps through. JP Morgan favors 2y spread wideners.

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  • Risk off vibes; USTs gain; 2y goes through

  • New issues


    Risk off vibes; USTs gain; 2y goes through

    As risky assets deteriorated intraday, Treasuries have rallied off the earlier lows with yields last anywhere from 1.5bps lower in the back end to 3bp higher in the front end. The 10y note yield is last 3.707% or 1.2bps lower on the day while 2s10s has flattened 3.7bps to -64.5bps after hitting -66bps earlier today. Meanwhile 5s30s is 1.4bps lower at 19bps. Equities ended lower across the board (DJIA -0.5%, S&P -0.98% and Nasdaq -1.08%).


    Earlier, the $42bn 2y auction came through the 1pm bid side by 2bps, drawing a rate of 4.3%. Indirects (68.2%) rose vs the previous month while directs (15.6%) dropped while the primary dealer allocation dropped to 16.2%. The bid-to-cover was stronger at 2.90x.


    Swap spreads in the front end and belly came off the intraday lows while the long end of the spread curve edged in lower into the close amid mixed volumes. IG new issuance saw two entrants, and in the process boosted the May total to $135bn – the forecast total for the month.   


    Looking at the front end of the spread curve, analysts at JP Morgan note that the recent the widening in spreads late last week came “on the back of better news regarding debt ceiling talks” and indeed they note that its swap spread narrowing bias across much of the curve “was predicated on debt ceiling risks as well as valuations that appeared wide” with exception of in the 2y sector, where the bank finds “valuations appeared too narrow and caused us to be neutral.”


    “With a debt ceiling resolution now appearing more likely and imminent (although of course, it is not yet a done deal), the case for a narrowing view relies entirely on valuations,” JP Morgan assesses.  “In the belly of the curve (the 5- to 10-year sector), spreads continue to appear 3-4bp wide versus fair value, which is sufficient for us to maintain a narrowing bias on swap spreads in the belly for now,” the bank finds.


    However, in the front end of the curve, JP Morgan continues to see the 2y spread appears “narrow to fair value” and given the improved tone and expectations around the debt ceiling, the bank judges the 2y spread “could be poised for a rebound towards wider levels” and it now looks for wider 2y maturity matched swap spreads.


    JP Morgan sees that one currently attractive way to position for wider 2y swap spreads is via a 2s/3s swap spread curve flattener, and specifically it proposes a 2s/3s weighted swap spread curve flattener (0.45:1 weighted), paired with a 20% beta-weighted forward swap curve steepener.


    2s -11.75bps (-0.875bps), 3s -14.5bps (unch), 5s -21.375bps (+0.625bps), 7s -27.125bps (+1.25bps), 10s -27.125bps (+0.625bps), 20s -65.75bps (-0.5bps), 30s -70bps (+0.125bps).



    New issues  


    • KfW plans a USD 5y Global at around swaps +36bps. Leads are BMO, Citi and GS.Aaa/AAA. Expected to price tomorrow.


    • 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. 


    • Ameren Illinois priced a $500m 10y FMB deal via MUFG, PNC, Scotia, SMBC and TSI.  A1/A. +127bps.


    • Lockheed priced a $2bn 3-part ($500m 5y, $850m long 10y and $650m 30y). Leads Barclays, Citi and SA-CIB.  A3/A-/A-.  +75bps, +110bps, +130bps.


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


    • Tokyo Metropolitan Government (A+) priced a $500m 3y. Leads Barclays, Citi, Goldman and MS (B&D). SOFR MS +84bps.


    • Korea’s Kubota Credit Corp (A) priced a $500m 3y bond through BofA, Barclays, MS and Nomura. +92.5bps.


    • China Construction Bank (CCB) Sydney (A1/A) priced a $500m 3y Green at Treasuries +55bps. Leads are ABC, BOC, Bank of Comms, CCB, Citi and CA.


    • Saudi Fransi priced a $900m 5y Sukuk at Treasuries +105bps. Leads are Citi, FAB, GS, HSBC (B&D), Mizuho and SFCAPI.