USD Swaps: Bear-flattening; Risk appetites assessed

Chart line 30 Jan 2023
USTs are bear-flattening while swaps are modestly wider as more bank issuance arrives. JPM and Barclays mull appetite for risky assets.

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  • Bear-flattening

  • Still lacking much appetite for risk: Banks

  • New issues


Bear- flattening

A steady selloff that began in European trading has seen yields at the front of the UST curve move around 6bps higher to 3.87% in 5y and taken the 30y up to 3.88% (+3bps). Shorter in, SOFR futures are little-changed in most of the whites after the fix fell by another bp to 5.05%, while red SOFRs are 3-4.5 ticks weaker. WTI is 80 cents stronger at $72.5, S&P futures are +0.1% and Apple stock remains about 1% lower than at the end of last week as the market tries to make its mind up about the applications for Apple’s new ski googles.    


In swaps, despite a handful of IG deals arriving including bonds from PNC and US Bancorp, SOFR swap volumes are below average across most of the curve except the 3y and 30y buckets. Two-year spreads are -10.5bps (+1.00), 5s are -22.50bps (+0.25), 10s are -26.25bps (+0.125) and 30s are -68.75bps (+0.75).


Still lacking much appetite for risk: Banks

Macro analysts at the banks have been tweaking their views this week following the debt ceiling deal, gains for AI stocks and the jobs data. Still, JP Morgan remains wary on risk assets and focuses on an expected reduction in liquidity along with recession risk (see here for more on the latter). JPM writes:


    “We retain a cautious stance on risk assets in our model portfolio as a looming liquidity contraction is added to recession concerns.


    “(This) is driven by several forces in the US (the impending Treasury General Account build up over the summer, the Fed’s continued QT, the continued shift from US bank deposits to Money  Market Funds, continued selling of bonds by US banks) as well as the June TLTRO repayment in the Eurozone.


    “The net effect of the above forces is that broad liquidity in the US, which we define as M2 + institutional money market fund assets (retail MMF assets are already in M2), will contract by another $1.1tr from here till year-end bringing the total  decline for 2023 to $1.7tr. In yoy terms, this would represent the worst US broad liquidity contraction since that seen after the Lehman crisis.


    “This severe deposit contraction would not mean that there would be less liquidity or cash to be invested in financial assets, but it would put more strain in the US banking system if these deposit outflows end up hitting vulnerable regional banks.”



In contrast, Barclays plays down the liquidity shift and highlights valuations and recession risk instead. It recommends waiting for better levels and reduced momentum to underweight risky assets:


    “Valuations seem very rich for the stocks driving the US equity rally, in our view. Breadth continues to narrow to historically low levels, but equities have shown resilience all year. For example, stocks have shrugged off bonds pricing out 70bp of implied 2023 cuts in recent weeks.


    “We have had to push out our recession call but we still expect an eventual recession, and that the Fed will keep pressing until the job market slows. The rest of the world is now slowing rapidly, and the lagged effects of hikes should eventually kick in. Equities don’t seem priced for either weaker growth or a more aggressive Fed


    “Momentum can be a powerful driver of near-term rallies. Our client interactions suggest that this is an ‘unloved’ rally, which means it could pull more investors in. We also think the impact of TGA liquidity drain is overstated; Treasury raised TGA by $550bn in a month in 2021. Hence, we move to the sidelines to wait for momentum to dissipate, and wait for a better underweight entry point.”


New issues

  • PNC Financial (A3/A-) plans USD 3y NC2 and 6y NC5 bonds at around Treasuries +155 and 195bps. Leads are Citi, MS and PNC.  


  • Finnvera is preparing a $1bn 5y in the area of swaps +48bps via BofA, Citi, JPM and TorDom.


  • US Bancorp plans USD 6y NC5 and 11y NC10 at around Treasuries +215 and 235bps. Leads are GS, RBC and USB.


  • Norway’s Aker BP (Baa2/BBB) is preparing USD 5y and 10y bonds through Citi, CA, DNB, ING, JPM and MUFG.  


  • New Zealand’s ASB Bank (A1/AA-) is preparing a USD 3y on the region of Treasuries +130bps. Leads are BofA, Citi, CBA and TorDom.


  • Insurance broker HUB International plans a $2.675bn 7y NC3 B2/B secured bond. Leads are ATB, Barclays, BofA, BMO, CS, GS, JPM, Macqurie, MS, Nomura and RBC.  


  • Korea’s SK Broadband (A3/A-) plans USD 3y or 5y bonds after meeting investors on Jun 12. Leads are BNPP, HSBC and Mirae.


  • Commercial Bank of Dubai (Baa1/A-) is preparing a $500m 5y Green bond at around Treasuries +140bps. Leads are Citi, ENBD, FAB, HSBC (B&D), JPM, Natixis and StanChart.  


  • Indonesia’s PT Pertamina Geothermal (Baa3/BBB-) is preparing a USD bond after meeting investors from Jun 13-20. Leads are ANZ, BNPP, Citi, HSBC, Mandiri, MUFG, SMBC Nikko and UOB.


  • Swedish Export Credit is working on a USD 5y Global via BMO, BNPP, Citi and Scotia. Aa1/AA+. Swaps +53bps.


  • Kommuninvest is working on a $1bn 2y deal via Barclays, BNPP, Citi and SEB at swaps +29bps.


  • NAB  yesterday priced a $2.5bn 3-part ($850m short 2y, $650m short 2y FRN and $1bn 5y). Leads are Citi, JPM, MS, NAB and TorDom. Aa3/AA-/A+. +70bps, SOFR +76bps and +110bps.