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USTs hit as Canada jumpstarts hikes again; 2y spread view
With little to no meat to chew on with regard to major economic data and Fed-speak front today, not many seem inclined to stand in the way of this morning’s UST sell-off with yields pushing higher still – especially in the wake of Canada's surprise rate hike. Indeed, Canada jump started its rate hike campaign again today after being the first in the G7 to pause with a 25bps hike up to 4.75% today. “Overall, excess demand in the economy looks to be more persistent than anticipated,” the BoC said in its statement.
Against this backdrop, the yield on 2y Canadian bonds has catapulted 20.5bps higher to 4.585%, with the 2y Treasury note yield up 11.3bps at 4.59% in sympathy. Further out, the benchmark 10y note yield is last 10bps higher at 3.76% while the 5s30s spread is 5.75bps narrower at -2.45bps.
Meanwhile, SOFR futures are 12 to 14 ticks softer in the reds and futures now assess a 68% probability of a pause versus 78% yesterday. Meanwhile SOFR swap spreads are wider across the board amid below average activity overall. As for corporate issuance, a decent slug of IG issuers have stepped up to the plate today (see below) amid mixed risk sentiment (Dow +0.16%, S&P +0.18%, Nasdaq -0.25%).
Meanwhile, in the rebuild of the TGA, more dealers are chiming in with their views on the impact on the 2y SOFR swaps spread (see Total Derivatives). For their part, strategists at BofA “expect 2y spreads to soon bottom out and then return to fair value of 0bp as the market fully digests the announcement effect of the coming Tbill supply surge." BofA expounds on this view below:
- ”…As the Fed and most analysts have argued over the years about market impacts of quantitative tightening (QT), the market moves are typically priced in upon announcement rather than during the actual issuance operations. The refill of the Treasury cash account (TGA) from near $0bn to around $700bn over the course of approximately 3 months is equivalent to a QT operation, but in lower duration Treasury securities.
“…Like QT, the TGA refill will cause a shift in government liability types held by the private sector. Treasury securities (one form of govt liability) will replace private sector holdings of Fed liabilities, which include reserves (bank deposits) and the overnight repo facility liability (RRP). While the mix of drain in reserves and RRP is not known in advance, it is not important for 2y spreads. The only difference between the TGA refill and general QT is that the Treasury securities coming into private accounts to fill TGA will be Tbills rather than the usual mix of higher duration coupon bonds and TIPS typical of QT. If intuition and the Fed's studies are correct - that markets move on the announcement of QT (and QE) rather than the ongoing operations - then we expect most of the 2y spread tightening to have already been priced.
“…There are still unknown parameters such as the speed of TGA refill and the distribution of Tbill supply over the next few months, and these details can still be market moving and potentially push 2y spreads tighter. A sloppy bills auction could also further tighten 2y spreads.
“…But once 2y spreads start to normalize, we expect the move to be fast because it is a relatively closely watched trade and we have seen strong mean reversion to 0bp in 2y spreads across large spread dislocations over recent years. This implies we would rather be early than late on buying 2y spreads, looking to get into a long 2y spread position between current levels of -11bp (headline 2y spread) and potentially as far down as -15bp if we get there.”
For more views on 2y spreads, please see Total Derivatives.
Currently, SOFR swaps – 2s -9.25bps (+2.25bps), 3s -16.25bps (+0.5bps), 5s -22.5bps (+0.5bps), 7s -29.25bps (+0.125bps), 10s -26.125bps (+0.25bps), 20s -65bps (+0.75bps), 30s -68.5bps (+1.125bps).
- Brookfield Capital Finance LLCl is working on a $500m 10y deal via DB and WFS. A3/A-/A-. Price talk: +250bps area.
- Swedbank is working on a 3y fixed/FRN benchmark via BofA, Citi. GS, JPM and WFS. Aa3/A+/AA. Price talk: +145bps area, SOFR equivalent.
- National Grid is working on a 5y and 10y benchmark via BofA, GS, MIZ and WFC. Baa2/BBB/BBB. Price talk: +195bps area, +230bps area.
- MassMutual is working on a 5y FA-backed benchmark via BofA, GS, JPM and USB>. Aa3/AA+/AA+. Price talk: +135bps area.
- McKesson is working on a 5y and 10y benchmark via BofA, GS and JPM. Baa1/BBB+/A-. Price talk: +130bps area, +170bps area.
- Vale Overseas is working on a 10y benchmark via BMOP, CA-CIB, Citi, JPM, MUFG, Scotia and SMBC. Baa3/BBB-/BBB. Price talk: +275bps area.
- 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. Price talk: +215bps area, +260bps area.
- 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.
- Kommuninvest priced a $1bn 2y deal via Barclays, BNPP, Citi and SEB at swaps +29bps.
- Swedish Export Credit priced a $1bn 5y deal via BNMO, BNPP, Citi and Scotia at swaps +53bps.