USD Swaps: T-Bills increased; Hedge funds & asset manager UST demand

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T-Bills increased; Hedge funds & asset manager UST demand

The recent barrage of both ‘hot’ and ‘cold’ economic data has come to an abrupt halt as there is no major data or Fed speakers ahead of next Tuesday’s CPI release and Wednesday’s FOMC announcement.   And this may portend to some lighter than typical trading this week as investors likely just re-jigger positioning ahead of the big events, some source surmise. 

Against this backdrop, the major domestic equity indices are bobbing their heads just above the surface this session (Dow +0.01%, S&P +0.21%, Nasdaq +0.34%) while USTs are bear flattening modestly.  The benchmark 10y note yield is last 2.5bps higher at 3.708% while the 2s10s spread is roughly 1.5bps narrower at -80.2bps. 

Meanwhile, SOFR futures remain a touch firmer in the whites after the latest fix dropped down to 5.06%, after peaking out up at 5.08% last week in the wake of the debt deal. In SOFR swaps, spreads are mostly lightly offered amid below average activity in all but the belly of the curve (i.e. 3y-7y) with swapped SSA deals from Kommuninvest, Swedish Export Credit , MuniFin, ADB and Rentenbank either priced or in the works.

Separately, with Mighty Joe Biden’s signing of the US debt ceiling deal over the weekend 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. 

Indeed, Treasury announced today that the weekly sales of T-Bills will increase a combined $42bn (i.e. 4wk bill increased to $60bn from $35bn, 8wk bill increased to $50bn from $35bn, 17wk bill increased to $46bn from $44bn) at next week’s auctions now that the debt deal has been reached/signed. 

However, the ramp up in UST supply will be seen in both the front-end and the back-end of the curve and strategists at BofA recently elaborated on both below as well as the market implications (see Total Derivatives).   However, an increasingly common question by BofA’s clients has been ‘who will buy the coupon supply?’ Well, the bank thinks that demand is most likely to come from hedge funds & asset managers which it details below:

”…We have long thought of 5 key UST demand sources: (1) banks (2) foreigners (3) pension/insurance (4) asset managers (5) hedge funds. We think banks & foreigners are largely sidelined; banks are seeking to reduce securities in favor of loans & foreigners face deeply negative FX hedged returns. Pensions have been underwhelming in their duration buying even as funded ratios improved.

 

“…Asset manager demand is likely dependent on extent of macro slowdown & de-risking behavior; USTs have re-gained risk-off diversification value, but positioning is already quite long according to CFTC data & our client survey. Incremental asset manager demand seems recession dependent.

 

“…Additional hedge fund (HF) bid will be conditional on extent of UST cheapening & repo availability. Hedge funds are already quite meaningfully involved in cash vs futures basis trading, as we have highlighted. Cheaper longer-dated UST cheapening will encourage additional demand, assuming leverage is available.

 

“…Dealers theoretically have more repo & HF leverage capacity but we worry balance sheets will get tight in 2H ’23. According to Fed data, HF repo use & UST holdings are well below levels seen in mid ’19 as of Q3 ‘22. If HF mid ’19 levels of repo & UST holdings were to grow by nominal GDP, this implies an incremental $500-600b of UST absorption capacity. It may not be that easy though especially as HFs have increased futures short (proxy for basis trade) by $200bn since the last filing.

 

“…Additionally repo availability may not be realized due to dealer balance sheet tightening. This may come from (1) typical year-end regulatory constraints (2) large UST supply surge & associated dealer warehousing that will absorb balance sheet capacity. Total repo activity already seems elevated with SOFR volumes near historic highs.

 

“…Bottom line:…UST supply surge & UST cheapening is imminent: MMF will buy most bill supply but cheaper levels required; coupon supply to be more dependent on asset manager & HF demand. Dealer leverage is key for HF absorption capacity.”

Currently, SOFR swaps – 2s -12.5bps (+0.125bps), 3s -17.875bps (unch), 5s -23bps (-0.25bps), 7s -29.125bps (-0.375bps), 10s -26.125bps (-0.625bps), 20s -65bps (-0.75bps), 30s -69.125bps (-0.75bps).

New issues

• New York Life is working on a 5y FA-backed benchmark via DB, GS, JPM and USB.  Aaa/AA+/AAA.  Price talk+130bps area.

   

• Fortune Brands is working on a 10y benchmark via BofA, Citi and JPM.  Baa2/BBB/BBB.  Price talk: +245bps area.

   

• Interpublic is working on a $300m 10y deal via Citi, JPM and MS.  Baa2/BBB/BBB+.  Price talk: +205bps area.

   

• Bacardi Ltd. is working on a 5y, 10y and 20y benchmark via BofA, Barclays, BNPP, Citi, JPM and TD.  Baa3/BBB-/BBB-.  Price talk: +170bps area, +200bps area, +25bps area.

   

• Swedish Export Credit is working on a 5y benchmark via BMO, BNPP, Citi and Scotia.  Aa1/AA+.  Price talk: SOFR + 55bps area.

   

• Owl Rock Income is working on a 5y benchmark via RBC, SBMC, TSI and WFS.  Baa3/BB-.  Price talk: +437.5bps area.

   

• Kommuninvest is working on a $1bn 2y deal via Barclays, BNPP, Cit and SEB.  Aaa/AAA.  Price talk: SOFR + 32bps area.

   

• NAB is preparing USD short 2y, short 2y FRN and 5y bonds at around Treasuries +90bps, SOFR equivalent and +130bps respectively. Leads are Citi, JPM, MS, NAB and TorDom.

   

• Rentenbank plans a 5y USD Global at swaps +35bps via Citi, HSBC, RBC and TorDom.

   

• Cheniere Energy is preparing a USD 10y note via CIBC, CA, MS, Natixis, RBC and WFS.  

   

• MuniFin plans a $1bn, Dec 2027 at swaps +45bps via Barclays, BMO, Daiwa and Nomura. Aa1/AA+.

   

• The Asian Development Bank priced a $2bn 2y and $2bn 10y Global bonds at swaps +23 and 49bps via Credit Agricole, Deutsche, JPM and MS.