USD Swaps: PCE moves chains toward June hike: Debt ceiling resolution nears

PCE moves chains toward June hike: Debt ceiling resolution nears

PCE came in higher than expected (0.4% vs 0.3% forecast) for both the headline and core. Treasuries sold off in choppy price action. The 10y note yield is last 3.835% or 1.2bps higher in yield while the 2y is last 4.579% or 4.2bps higher after testing 4.609% briefly earlier.

The swings come amid strength in equities (DJIA +1.08%, S&P+1.08% and Nasdaq +1.74%) as the debt ceiling agreement looks to be within reach on news reports of a 2y spending cap. June 6th to 8th 2023 Bills are down sharply in response, with yields plunging 75 to 80bps to around 5.6% yield. TIPS BEs are widening in a flattening move of up to 4bps higher, led by the front end.  

At the very front end, the market has continued to price in a greater probability of a 25bps hike, with futures now seeing a 59.6% chance, from 51% at yesterday’s close. “The moves in the market are very telling as there are big moves… sometimes on the back of nothing, and that underscores anxiety in the markets,” a source suggested.

The shortened session will also sap liquidity due to early exits in an already liquidity challenged market, sources say. On the swap spread side, spreads are mostly still tightening amid mixed volumes across the board - despite the seemingly better news on the debt ceiling front. Elsewhere, IG new issuance is done for the week, sources say, with the final tally coming at $14.45bn or slightly under the $15bn to $20bn that had been expected for the week. Month to date for May is $137.5bn or just over the $135bn forecast.

Looking toward a debt ceiling resolution, analysts at JP Morgan map out the next steps likely to unfold. “As Treasury experiences a lifting of its debt ceiling constraint, it is likely to quickly ramp up the TGA back to normal levels” with it estimating over “$400bn between now and the end of July.”

“This is important because history strongly suggests that the increase in the TGA (one of three large liabilities on the Fed's balance sheet) will be mostly offset by declines in Reserves, and the impact to RRP balances is likely to be much more muted,” JP Morgan finds.

“Given that this dynamic comes on top of the still-continuing deposit outflows and inflows into government MMFs, it would appear likely that banks (particularly regional banks) are likely to experience continuing pressure in their deposit books,” the bank anticipates and the implications for markets is several-fold:

”First, banks will likely continue to maintain an up-in-liquidity bias on the asset side of their balance sheet, and thus credit tightening is likely to be a core element of the backdrop going forward.

 

“Second, continuing deposit-to-MMF migration and elevated RRP balances will likely foster an increase in deposit funding costs and likely lead to an uptick in deposit beta estimates - this would lead to diminished interest rate duration risk capacity on bank balance sheets and likely weaken bank demand for securities in the intermediate-to-long maturity sectors.

 

“As a rule of thumb, we estimate that each 1% rise in  the systemwide estimated deposit beta would result in a reduction of duration risk appetite to the tune of $100bn 10-year equivalents.”

2s -9bps (-1bps), 3s -16.25bps (-0.375bps), 5s -19.5bps (-0.75bps), 7s -26.25bps (unch)*, 10s -26.125bps (+0.25bps), 20s -67.125bps (-0.5bps), 30s -70bps (+0.375bps).

*adjusted for the 0.8bps give.

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.