USD Swaps: Flatter before minutes, Fedspeak; Stay risk averse?

Price charts 25 Nov 2021
The curve is flatter, echoing the price action in Bunds and gilts ahead of Fedspeak and the minutes. Elsewhere, banks remain risk averse.

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  • Flatter before minutes, Fedspeak

  • Brevan feeder fund down so far this month

  • Banks: Stay risk averse

  • New issues


Flatter before minutes, Fedspeak

The curve is flatter again from the front end in early trading, echoing the price action in Europe following higher-than-expected UK inflation data and a slightly softer IFO survey of German business confidence (see Total Derivatives).  SOFRs are down 1-3 ticks in the whites and front reds but up by about the same further out, the 5y UST is 3.74% (unch) ahead of today’s $43bn auction, while the 30y is 3.94% (-1bp).


Swap spreads are a touch tighter as JPM joins the list of new issuers with 2s at 6.50bps, 5s at -21.75bps (-0.25), 10s at -27.25bps (-0.25) and 30s at -70.125bps (-0.125). Swap volumes are above-par out to 7y but slightly below average at the long end.        


Next up, Fed Governor Wallace will discuss the economic outlook and the Fed will print the minutes of the May FOMC meeting. BNP Paribas reckons the minutes will likely show a “broad consensus” on the Committee for the decision to hike in May and also support a potential pause in June. Fedspeak since the meeting has shown a "clear bias to do more from the hawks", the bank reckons, albeit perhaps following a pause next month. Fed centrists have “generally seen a pause as appropriate and data dependence to rule decisions thereafter,” BNPP judges. The bank adds that what the minutes reveal about the Committee’s discussions on the debt ceiling and bank-lending conditions will be of particular interest.


Brevan feeder fund down so far this month

The increase in the Brevan Howard Master Fund’s (modest) USD and GBP DV01 long at the end of April does not seem to be working this month, judging by the latest results from the BH Macro feeder fund.


Against the backdrop of a 25bps rise in 10y UST yields since the end of April, BH Macro was down -1.32% for the month to May 19, taking its loss for the year to -5.28%.  In comparison, the Bloomberg US Treasury index was up around +2% and the S&P was up +9% for the year to May 19.   


Banks: Stay risk averse

S&P futures are -0.5% in early trading and a couple of banks remain bearish after updating their macro views this week.


Barclays reports that feedback from investor visits confirmed split views on interest rates. “Some felt that the US was softening quickly; one client expects zero May payroll growth. Many others argued equally strongly for the Fed to hike in June.” However, they found more consensus on equities: “most” clients said the rally had gone “too far”, before adding the caveat that they had been wrong about this for a few weeks.


The bank gauges  the outlook for the Fed and for the debt ceiling:


    “We expect enough softening and uncertainty to keep the Fed on pause. Meanwhile, a ‘clean’ debt ceiling raise is now arguably out of the picture. For months, the Administration insisted on one, but is now negotiating with the House. That means any eventual deal will come with fiscal cuts and a growth drag. We still expect a deal, and also a considerable slowdown in US growth”


And it concludes bearishly:


    “Risky assets may be getting ahead of themselves, given the macro backdrop. Equity markets are at YTD highs, while bond  yields have been pushing higher. Implied equity vol is close to YTD lows, arguably pointing to complacency


    “We had recommended underweighting risk assets last week. That call proved wrong, but we stay with it for the coming week. Any negotiated debt ceiling deal is likely to come with fiscal headwinds. Debt ceiling talks could drag on for months if Treasury can make it to mid-June. The student loan moratorium ending will also be a mild drag in coming quarters


    “Stronger US data goes hand in hand with elevated policy rates. We still think a June hike is unlikely, but the chance of 2023 cuts continues to recede


    “The breadth of the US equity rally continues to narrow ever further. A handful of stocks are driving all the index-level gains, which seems unsustainable. And the macro backdrop, including China’s growth picture, is quite negative”.


Thus Barclays remains “underweight” risk assets and will be watching the FOMC minutes today and the PCE data on Friday, with the market looking for the PCE core deflator to hold steady at 4.6%.


Elsewhere, the macro team at JP Morgan is equally wary of risk assets in the near term and raises the weight of cash and gold, while adding “tactical” 5y longs and “medium-term” 10s/30s steepeners:


    “Even aside from the debt ceiling issue, we maintain that the risk-reward for equities is poor given elevated risk of recession, stretched valuations, high rates and tightening liquidity, and we favor cash over equities at the former’s ~5% yields.


    “A divergence remains between rates markets that expect the Fed to cut this year, equity markets that interpret those potential cuts as positive for risk, and the Fed’s more hawkish rhetoric. This gap is likely to close at the  expense of equities, as rate cuts will likely only transpire from a risk off event, and if rates stay higher they should weigh on equity multiples and economic activity.”


New issues

  • KfW plans a $4bn 5y Global at swaps +34bps. Leads are BMO, Citi and GS.


  • JP Morgan is preparing a USD 11y NC10. Seen at around USTs +190bps and self-led.  


  • Hungary’s MFB Bank (Baa2/BBB) is preparing a USD 5y at around Treasuries +300bps. Leads are BNPP, Citi (B&D), Erste and ING.


  • Seagate HDD (BB) is preparing $1bn in 6.5y NC3 and 8y NC3 bonds at around 8.375% and 8.625%. Leads are BofA, BNS, BNPP, MS, MUFG and WFS. 


  • Malaysian sovereign wealth fund Khazanah (A3/A-) plans USD 5y Sukuk and 10y conventional bonds at around Treasuries +135 and 160bps. Leads are BofA, CIMB, DBS, JPM, Maybank, MUFG and OCBC.  


  • UAE’s MAF (BBB) yesterday priced a $500m 10y Green Sukuk at Treasuries +140bps. Leads are ADCB, ADIB, Citi, DUBAII, FAB, HSBC (B&D) and StanChart.