USD Swaps: Flatter; AI stock jump; Fed views

Chart and prices 12 Aug 2020
SOFRs are weaker and the UST curve is a touch flatter as risk assets benefit from Nvidia's AI-driven gains. Meanwhile banks prep for debt limit chaos.

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  • Losses pared but flatter; AI stock surge

  • Minutes reviewed

  • Callables and Formosas: Merrill Lynch

  • New issues: Kexim


Losses pared but flatter; AI stock surge

Treasuries have pared early losses but the front end remains weaker and the curve is flatter ahead of the data with the 5y at 3.79% (+1bp) as Nasdaq futures surge by 2.2% following Nvdia’s AI-driven gains. In swaps, spreads are tighter again with 2s at -9.00bps (-1.50), 5s at -19.25bps, 10s at -27.50bps (-0.125) and 30s at -70.75bps (-0.125). Outright swap volumes are above-par out to 10y.


In the news, after Fitch put the United States’ AAA rating on ‘Watch Negative’ yesterday, the WSJ reviews planning at SIFMA, BofA and JPM for potential debt-ceiling chaos (link). Meanwhile US 4y CDS are up again today to around 67bps after falling back to 55bps last week.       


Minutes reviewed

At the front end SOFR futures are up to 2-4bps weaker in the whites and 5.5-7.0bps lower in the reds. In the research, banks test their views against the FOMC minutes released yesterday. BNP Paribas reckons that Fedspeak since the May meeting has “recast the debate” around the June meeting as a choice between a ‘hike’ or a ‘skip’ rather than a ‘pause. In the bank’s view, this is “a more forceful tightening bias compared to merely pausing, as it leans with more conviction to future action.”


However, despite the shift in rhetoric BNPP continues to anticipate a ‘pause’ at the June meeting and expects “deteriorating economic conditions to obviate  the need for additional restriction later this year,” with the risk upside surprises the labor and inflation data might yet cause Fed officials to “re-engage with further rate hikes,” which the bank sees as a greater risk than a quick pivot to cuts.


Elsewhere, NatWest has a similar view of the Fed after the minutes while noting the importance of next week's employment report and the CPI data due a day before the June 14 FOMC meeting. It reckons that the hiking cycle is “probably over” and tightening credit conditions are likely to “spill over to the broader economy and could potentially lead to a deeper recession than we currently expect in H2 2023. NatWest adds that Chair Powell may also be a bit more open to this view, given his comments last week.


Callables and Formosas: Merrill Lynch

  • Merrill Lynch sold a $40m 10y NC5 fixed callable Formosa 5.3% due Jun 2033. The note is callable annually from Jun 2028. Leads are KGI and Sinopac and announced May 24.


New issues: Kexim

  • Kexim (Aa2/AA) plans USD 10y and/or EUR 3y, 5y or 7y (Green) bonds after meeting investors on May 25. Leads are Citi, CA, HSBC, ING, JPM and SocGen.


  • Malaysian sovereign wealth fund Khazanah (A3/A-) yesterday priced a $750m 5y Sukuk and a $750m 10y bond at Treasuries +93 and 118bps. Leads are BofA, CIMB, DBS, JPM (B&D), Maybank, MUFG and OCBC.