USD Swaps: Job, jobs and even more jobs; UST supply jump imminent

USTs are bear flattening with today’s surprising jump headline NFP despite other signs of cooling. BofA looks at the imminent jump in UST supply.

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  • Job, jobs and even more jobs; UST supply jump imminent


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    Job, jobs and even more jobs; UST supply jump imminent

    With the debt limit hurdle finally crossed, the focus today shifted to job, jobs and even more jobs.  To be sure, this morning’s May non-farm payrolls report showed that a whopping +339k jobs were created last month (versus Bloomberg consensus of +195k) – a sign that the labor market remains scorching hot in the face of the Fed’s rate increases.


    That said, despite this solid pick-up in hiring, the data also showed some welcomed signs of a mild chill in the labor market.  Indeed, the unemployment rate ticked up to a higher than expected 3.7% (versus 3.5% Bloomberg consensus) while average hourly earnings unexpectedly ticked down to 4.3% YoY (versus 4.4% Bloomberg consensus).  In all, a mixed report that will likely leave the June ‘skip’ decision up to the May CPI data on June 13th.


    Post-data, the major domestic equity indices are in a state of jubilation in the early afternoon trade (Dow +2%, S&P +1.46%, Nasdaq +1.06%) as risk market investors are placing their bets on a June pause – despite fed funds futures currently seeing the probability of a June hike increase to 34.4%, up from 23.5% yesterday.  Notably, the black-out period for the Fed starts tonight.


    Meanwhile, in Treasuries, the front-end has been hit in a bear-flattening move that currently sees the benchmark 2y note yield up a rather hefty 15.6bps at 4.495% while the 2s10s spread has narrowed 6.4bps to -81.6bps.  In SOFR-space, red SOFR futures are posting 18.5 to 20 tick losses while SOFR swap spread are wider across the board amid below average activity in all tenors with the spread curve steepening against the flattening in underlying rates.


    Separately, with the US Senate’s approval of the US debt ceiling deal that will see the issue suspended until after the next US election, the door is now open for a significant ramp-up in T-bill issuance as US Treasury restores its cash balances held with the Fed.  However, the ramp up in UST supply with be seen in both the front-end and the back-end of the curve and strategists at BofA elaborate on both below as well as the market implications:


      ”…Front end supply: we have written extensively on the expected UST supply surge post debt limit. We continue to believe this will see $1tn+ of bill supply between now & end Aug, a TGA rebuild to $600b by end Sept that will draw 90% / 10% from ON RRP / reserves, & see material bill cheapening vs OIS (3m bills will likely remain 10-20bps cheap to OIS). 2Y swap spreads have done well pricing the expected supply, but we see further tightening risk as the supply hits.


      “…We would be surprised if this sidelined demand prevents a re-pricing of bills. In Jan-Feb UST issued $350b net bills, 3m bills vs OIS cheapened ~20bps from end ’22 to mid-Feb ’23. Sidelined demand hasn’t prevented supply induced cheapening. It likely won’t now.


      “…The good thing about the imminent bill supply surge: we know the marginal demand source, MMF in ON RRP. The bad news: we don’t know the price. We still expect MMF will extend out of ON RRP if bills vs OIS cheapen enough; MMF tell us 3m bills vs OIS at 10-20bps is enough. We expect the high end to be realized given extent of supply surge.


      “…Back-end supply: clients have flagged UST supply risks beyond front end. Between now & year-end we expect $1.4tn of net bill supply + $660b of net coupon supply. Treasury’s financing needs are large with TGA rebuild, elevated deficits, & QT. Indeed, marketable debt ex-Fed will rise sharply & cheaper USTs are likely on horizon.”


    Currently, SOFR swaps – 2s -11.125bps (+0.375bps), 3s -16.75bps (+0.5bps), 5s -20.625bps (+0.875bps), 7s -26.75bps (+0.75bps), 10s -23.75bps (+2bps), 20s -62.875bps (+2.25bps), 30s -67.125bps (+1.25bps).