USDi: Front-end BEs fall as RYs rise; Attractive RY levels?

Click here for SDR inflation swap trade

Front-end BEs fall as RYs rise; Attractive RY levels?

Today’s better than expected data (i.e. jobless claims, GDP, core PCE) as well as the ongoing impasse on the debt ceiling after House Speaker McCarthy this said this morning that “I don’t know if we have a deal today” have put renewed pressure at the front-end of the nominal and real yield curves today.

And against this backdrop, as well as a sharp downturn in energy prices this session (gasoline -3.62%, Brent -3.8%, WTI -4.18%), the front-ends of both the TIPS breakeven and inflation swaps are under a bit of pressure while longer tenors still have their head just above the surface in the early afternoon trade today. 

However, with the recent sell-off in real yields, some suggest that levels – at least further out the curve – may be reaching interesting levels.  “30y real yields are back close to the recent highs which has attracted buyers of late but clearly remains a difficult turn to predict,” one dealer surmised.

In derivatives-space, inflation swap trades thus far on the SDR today include 1y ZC swaps at 230bps, 5y ZC swaps at 245bps, 10y ZC swap at 252.75bps and 30y ZC swaps at 249.625bps (for all of today’s trades, see Total Derivatives SDR, which now also includes information on broker/platform).

Elsewhere, in today's Fed-speak, Boston Fed President Collins hinted that the Fed may be close to hitting the pause button.  "While inflation is still too high, there are some promising signs of moderation," Collins stated.  "I believe we may be at, or near, the point where monetary policy can pause raising interest rates."

Looking ahead, tomorrow brings the April PCE data and the final May University of Michigan consumer sentiment survey ahead of the early close for the Memorial Day weekend.

In the screens in the early afternoon trade, the 2y breakeven is seen at 211.875bps (-2bps), 5y at 217.375bps (-1.25bps), 10y at 226bps (-0.25bps) and 30y at 232.375bps (+0.375bps).

Barclays: Leaning forward - 1y1y breakeven long with TIIApr24s and TIIApr25s

Strategists at Barclays still believe that breakevens offer value across most of the curve, but they find that the TIIApr24s appear rich and they shift their recommended long expression from 2y spot breakevens to 1y1y, using the TIIApr24s and TIIApr25s.  The bank expounds below:

”… In the short end, say out to the 4y point where most forward 1y rates are below 2.2%, we think there is upside risk because of the combination of strong wage growth, still high consumer inflation expectations, and elevated pricing power, and have been recommending 2y breakeven longs. The TIIApr24 BE, though, is over 20bp rich to Barclays (energy futures adjusted) NSA CPI forecast, and has outperformed the TIIJan24 and TIIOct24 breakevens by about 10bp (carry adjusted) this week. The issue screens rich on the rich/cheap framework presented in our Inflation-linked Daily, earning a low score because of the 3m z-score on its spread to the real spline curve and its absolute spread on z-spread. The TIIApr24s also appear rich on a matched-maturity CPI swap to cash breakeven iota spread and on relative z-spread. The issue represents the first 1y in a TIIApr25 BE long, which we have been recommending and is up about 14bp inclusive of carry since mid-March. Because the TIIApr24s appear rich, we recommend stripping it out of a 2y BE long, and turning the position in to a 1y1y breakeven long. This structure also has the benefit of reducing spot energy exposure, which we think is appropriate since the front RBOB contract is up about 11% from earlier this month. The implied forward 1y1y is currently 2.08%, we target a rise to 2.4%, and use 1.80% as a stop.”