USD Swaps: Better data jolts front-end; 7y auction preview

Chart line down Oct 2022
This morning’s batch of stronger than expected data has jolted front-end yields higher still. JP Morgan preview 7y note auction.

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  • Better data jolts front-end; 7y auction preview

  • New Issues


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    Better data jolts front-end; 7y auction preview

    This morning’s batch of stronger than expected data (i.e. jobless claims, GDP, core PCE) has poured some cold water on the “skip” or “pause” narrative for rate hikes as economic conditions don’t seem to be deteriorating as fast as originally expected.   


    Accordingly, the front-end of the Treasury curve has been hit once again with the benchmark 2y note yield propped another 5.8bps higher at 4.436% but off the immediate post-data peak of 4.5226%.  Further out, the benchmark 10y note yield is last another 2.7bps higher at 3.769% while the 5s30s spread is 6.1bps narrower (give adjusted) at 14.2bps. 


    In SOFR-space, red SOFR futures are 6.5 to 10.5 ticks softer while SOFR swap spreads are mixed with the spread curve steepening against the flattening in underlying rates amid mixed activity, best seen at the 5y and 10y tenors.  In the backdrop, IG new issuance has largely tailed off this session amid a mixed risk backdrop (Dow -0.29%, S&P +0.39%, Nasdaq +1.17%).


    Elsewhere, on the debt ceiling front, House Speaker McCarthy warned that “I don’t know if we have a deal today,” and clearinghouses are getting a bit nervous as the impasse raises questions around collateral.  Indeed, the CME stated today that it “could consider” implementing risk mitigation tools with regard to Treasuries like adjusting haircuts or margins for UST collateral at the clearinghouse. 


    Ahead, Treasury rounds out this week’s coupon supply cycle with today’s $35bn 7-year note auction, unchanged from last month, after yesterday’s $35bn 5y note auction was unequivocally strong (see Total Derivatives).  Heading into today’s auction, strategists at JP Morgan think some cheapening may be needed for a similar result today and they highlight the following:


      ”… . The April auction cleared 1.5bp cheap to pre-auction levels as the share of end-user demand was roughly unchanged at 85.2%. Interestingly, on average over the last six months, 7-year auctions have tailed by 1bp.


      “…Further, the only auction that stopped through during this period was in January, when end user demand hit a record 93.9%. Auction allotment data shows foreign investor takedown declined 2%-pts to 11.3%, while investment manager demand rose 2.8%-pts to 71.4%.


      “…Since the April auction, 7-year yields have risen 18bp. Along the curve, the 7-year sector appears somewhat rich versus the wings after adjusting for the level of yields and the shape of the curve. Meanwhile the WI roll opened at -1.5bp, slightly rich to our estimate, and has since cheapened to -1.375bp.


      “…Given rich valuations and the recent history of tails, we think this auction is likely to require some concession from current levels in order to be absorbed smoothly.”


    Currently, SOFR swaps - 2s -8.625bps (-1.25bps), 3s -17.25bps (-1.5bps), 5s -19.25bps (-0.5bps)*, 7s -28.25bps (-0.25bps), 10s -27bps (+0.5bps), 20s -66.5bps (+0.25bps), 30s -70.5bps (+0.125bps).


    * adjusted for the 3.5bps give. (CORRECTS)



     New issues

    • 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.