USD Swaps: Softer ISM Services helps pause cause; Busy IG; Spreads tighten

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The UST curve bull steepened. Barclays assesses ISM Services data. Swap spreads narrowed amid a busy IG day. JPM and Citigroup weigh in on 2y spreads

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  • Softer ISM Services helps pause cause; Busy IG; Spreads tighten

  • Zero-coupon callables and Formosas

  • New issues


    Softer ISM Services helps pause cause; Busy IG; Spreads tighten

    Treasuries have gained this afternoon, though remain shy of the highs seen in the wake of softer ISM Services data this morning. The 10y note yield is last 0.5bps lower in yield at 3.693% while 2s10s is last 3bps steeper at -78.3.bps and 5s30s is 2bps steeper at 6.5bps. Equities ended with small losses (DJIA -0.59%, S&P -0.18% and Nasdaq -0.09%). At the close, futures have a pause priced at a 79.4% probability – up from 74.7% on Friday.  


    Delving into the softer ISM Services data seen this morning, analysts at Barclays view that “at face value, recent signs of softening are encouraging to the FOMC, suggesting that tight policy is gaining traction against activity and price pressures in the resilient service sector” and the bank suggests “the committee would likely take particular encouragement from the ongoing moderation in the prices paid component, which is steadily approaching deflationary territory after having been stubbornly elevated since the onset of the Fed's hiking campaign.”


    However, Barclays “doubts that the committee would take a strong signal from these developments, in part because the two leading aggregate PMIs continue to send mixed signals about service sector activity, as the S&P Global PMI showed a healthy 54.9 reading in May” and Barclays notes “at least some of the input price moderation likely reflects declines in volatile energy prices from April.”


    Elsewhere, swap spreads narrowed amid a decent slate of issuance that was likely swapped amid mixed volumes best seen in the belly and back end. Just over $20bn priced in IG new issuance today and thus in the first day of the week it has already matched the forecasts for the volume for the week. Aside from Yankee FIGs (BNS $2.25bn 2-part and Macquarie $1.75bn 3-part), Truist Financial came with a $3.25bn 2-part, Capital One priced a $2.5bn 2-part and John Deere priced a $2.5bn 4-part.


    Meanwhile, in the rebuild of the TGA, analysts at JP Morgan expect “a relatively stable RRP” with the view that T-bill supply “will be easily absorbed by the market” and thus, in the context of swap spreads, this point to a widening bias in 2y swap spreads in coming weeks, the bank believes. 


    JP Morgan views the recent cheapening in 3m Bills, for example, “as being the result of T-bill avoidance ahead because of the debt ceiling standoff, which of course means that this is likely poised to reverse in coming weeks.”


    Thus, should T-bill valuations “richen back to average levels seen in recent history prior to the debt ceiling standoff, that could pressure front end spreads wider overall,” the bank finds. When examining a reduced-form variant of its 2y swap spread model, using the 3M SOFR-minus-T-bill spread, the 3m/2y Treasury curve and the RRP balance as factors, JP Morgan points out that “3M T-bill spreads have a coefficient of 0.2, meaning a rebound in this factor to +15bp (recent average prior to the debt ceiling standoff) would exert 6bp of widening pressure on 2Y swap spreads.”


    “All in all, we see 2y swap spreads reverting back towards +5bp,” JP Morgan forecasts and therefore it recommends initiating widening exposure in the 2y sector.


    On the other hand, analysts at Citigroup view 2y spreads “now trading virtually fair” on its model based on 3m OIS/GC and 2y SOFR/FF basis - thus capturing “long-run expectations for repo (e.g. a variable that tracks QT/supply) and a short variable that captures the cost of funding (3m OIS/GC).” Going forward, Citigroup thinks 2y spreads “can cheapen up over the summer as term GC become smore stressed, directionally with spot GC, and the market shifts expectation for SOFR to cheapen up further from here.”


    2s -12.75bps (-2bps), 3s -18bps (-1.625bps), 5s -23bps (-2.25bps), 7s -28.5bps (-1.5bps), 10s -25.75bps (-2bps), 20s -64bps (-1.125bps), 30s -68.5bps (-1.25bps).



    Zero-coupon callables and Formosas:  


    • JP Morgan sold a $30m 25y NC6 zero coupon callable (non-Formosa). The EMTN matures Jun 2048 and is callable annually starting Jun 2029. Self-led. Estimated IRR 5.12%. Announced Jun 1.


    New issues  

    For a complete review of issuance over the past week, please see USD New Issues.


    • Municipal Finance plans $1bn, Dec 2027 bond issue at around swaps +47bps via Barclays, BMO, Daiwa and Nomura. Aa1/AA+. Expected tomorrow.


    • 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. Expected to price tomorrow.


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


    • Macquarie Bank launched a $1.75bn 3-part ($700m 3y, a $300m 3y FRN and a $750m 11y NC10 fixed-to-floating). Leads BofA, Goldman, HSBC, Macquarie and WFS. A1/A+/A for 3y tranches and A2/BBB+/A for 7y. +110bps, SOFR +124bps and +220bps.


    • Ford Motor Credit launched a $1.75bn 2-part ($900m 3y and $850m 7y). Leads Barclays, BNP Paribas, CACIB, GS, Lloyds, WFC. Ba2/BB+/BB+. 6.95% and 7.2%. It dropped plans for a 3y FRN.


    • Truist Financial launched a $3.25bn 2-part ($1.5bn 4y NC3 and $1.75bn 11y NC10). Leads BofA, JPM, MS and TSI. A3/A-/A.  +193bps and +218bps.


    • Dollar General priced a $1.5bn 2-part ($500m 5y and $1bn 10y). Leads BofA, Citi and GS. Baa2/BBB. +137bps and +177bps.


    • Capital One priced a $3.5bn 2-part ($1.75bn 6y NC5 and $1.75bn 11y NC10). Leads Citi, GS, JPM and MS. Baa1/BBB/A-. +248bps and +268bps.


    • Bank of Nova Scotia priced a $2.25bn 3-part ($1.1bn 2y, $400m 2y FRN and $750m 5y). Leads BNS, BNPP, MS. A2/A-/AA-. +100bps, SOFR +109bps and +147bps.


    • BNP Paribas priced a $1.5bn 6y NC5 at Treasuries +150bps. Self-led. Aa3/A+/AA-.


    • HP Enterprise priced a $800m 2-part ($250m tap of its 5.9% Oct 2024 and $550m 5y). Leads BAML, Citi and Santander. Baa2/BBB/BBB+. +105bps and +145bps.


    • Burlington Northern Santa Fe priced a $1.6bn 30y fixed. Leads Barclays, MS and WFC. A3/AA-. +130bps.


    • Reinsurance Group priced a $400m 10y. Leads BofA, JPM and USB. Baa1/A. +235bps.


    • Piedmont Natural priced a $350m 10y. Leads CS, YD, TSI and USB. A3/BBB+. +170bps.    


    • Northwestern Mutual Life priced a $700m 5y FA backed. Leads BofA, GS, JPM, and PNC. Aaa/AA+/AAA. +107bps.      


    • John Deere priced a $2.5bn 4-part ($600m 2y, $600m 3y, $300m 3y FRN and $1bn 7y). Leads GS, HSBC, JPM and TD. A2/A/A+. +70bps, +65bps, SOFR +79bps and +95bps.


    • ANZ Bank priced a $1.35bn 3y Covered Bond. Leads ANZ, Barclays, HSBC, RBC and TorDom. Aaa/AAA. SOFR +73bps.