USD Swaps: USTs struggle pre-data; Pause paused?

Oil nodding donkeys
UST yields pushed higher overnight and then did little in London trading with headlines focusing mostly on Saudi-led oil price rises and ahead of data

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  • USTs struggle in the void

  • Bank capital requirements to rise: WSJ

  • Barclays: Possibility of a June pause diminished

  • New issues:


USTs struggle in the void

Core global bond markets sold off slightly at the start of a new week of trading that seemed to be floundering amid a lack of market moving headlines and ahead of PMI and ISM data later on today. USTs are faring a little better than EGBs as the 10y UST yield has pushed about 6bps higher to 3.75% versus rises of 7bps by Bund yields.


Amid an absence of other news, a cut in oil production by Saudi Arabia has caught the eye this morning, with the upshot of a weekend OPEC+ meeting being a 2.5% or so rise in oil futures. In addition, reports of a surge in US debt issuance in the event of the expected completion of the debt ceiling agreement has perhaps helped set the tone in fixed income as major equity indices are lightly mixed while Dow futures are currently +0.1%.


Bank capital requirements to rise: WSJ

In the press, the WSJ reports that ‘Big Banks Could Face 20% Boost to Capital Requirements’  (link) with regulators expected to propose measures that could “raise overall capital requirements by roughly 20% at larger banks on average.”


It says that “the precise amount will depend on a firm’s business activities, with the biggest increases expected to be reserved for U.S. megabanks with big trading businesses” and adds that investment and wealth management banks with a lot of fee income could also face higher capital requirement. The article says that firms with $100bn in assets may have to comply, down from $250bn at present.


Elsewhere, the WSJ reports that “Investor Bets on Fed Rate Cuts Fade” (link) but the article is based mainly on views and is not by Nick Timiraos, the Journal’s current Fedwatcher. And the Financial Times leads with ‘US banks prepare for losses in rush for commercial property exit’ (link).


New issuance has had a steady start to the week but with some of the more sizeable deals announced so far not expected to price until Tuesday most of the tightening in swap spreads has occurred at the front end. At the time of writing the 2y spread is -1.25bps at -12bps, 5y is -0.75bps at -21.5bps, 10y is -0.5bps at -23.75bps and 30y is -0.125bps at -67.5bps.


And in USTs the curve has sold off in parallel with the 2y yield +5bps at 4.55%, 5y +5bps at 3.90%, 10y is currently +5bps at 3.74% while 30y is +5bps at 3.94%.


Barclays: Possibility of a June pause diminished

In its latest look at rates, Barclays says that pre-blackout Fedspeak has "leaned dovish.” Established doves such as Fed Governor Jefferson and Philadelphia Fed President Harker talked up a pause last week but even officials such as Governor Waller were sounding open-minded about a pause. 


However in the wake of NFPs Barclays says that the argument for pausing is weakening as it is "unlikely that the terminal rate has been reached." It continues: "at the March FOMC meeting, the Fed forecasted an unemployment rate of 4.5% by Q423, core PCE inflation of 3.6% in 2023 and a terminal rate of 5.1%. The unemployment rate forecast is too high (despite an uptick to 3.66% in May), the inflation forecast appears too low and by extension, the terminal rate forecast is too low.” As a consequence, reckons Barclays:


    "Even if the Fed does not hike in June, the median forecast for the YE23 dot is likely to move to at least 5.4%, in our view. Whether it moves even higher would depend on whether the Fed hikes in June and the extent of the upward revision to their inflation forecast


    "We maintain our recommendation to short SFRZ3 (entry: 3.90% current 4.95%). We had been recommending pairing it with 2yf2s10s curve steepeners (entry 23bp, exit 16bp). With the debt limit behind us and bank data stable, we are unwinding that as a hedge. Tail risks have diminished and in our baseline view, the forward curve should be flatter."


New issues:

  • MuniFin plans $1bn, Dec 2027 bond issue at around swaps +47bps via Barclays, BMO, Daiwa and Nomura. Expected tomorrow.


  • BNP Paribas is preparing a USD 6y NC5 at around Treasuries +175bps. Self-led.


  • The Asian Development Bank plans a 2y USD bond at around swaps +24bps and a 10y swaps  +50bps bond via Credit Agricole, Deutsche, JPM and MS.


  • Rentenbank plans a 5y USD offering at around swaps +36bps via Citi, HSBC, RBC and TorDom.


  • Macquarie Bank plans a three-tranche USD bond consisting of a 3y fixed-rate bond at USTs +135bps, a 3y FRN at the floating-rate equivalent and an 11yNC10fixed-to-floating rate bond initially at USTs 135bps and then at SOFR +235bps or so. Via BofA, Goldman, HSBC, Maquarie and WFS.


  • ANZ Bank plans a 3-year USD Covered Bond at SOFR +75bps via ANZ, Barclays, HSBC, RBC and TorDom.