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Choppy pre-CPI UST trade amid supply; Hawkish holds are hard
After an early session bear steepening flush ahead of today’s double whammy supply dump (i.e. 3y & 10y note auctions), and a full bull steepening retracement after the supply was digested, the Treasury market is closing out withing spitting distance (~ 1-2bps) of Friday’s closes ahead of tomorrow’s much-anticipated May CPI release and Wednesday’s June FOMC decision.
Indeed, with the curtains falling on today’s session, the benchmark 10y note is last 0.2bps lower at 3.738% after hitting a low water mark of 3.7086% and then a high water mark of 3.7918% - all in the very early trade. Meanwhile, on the curve, the 2s10s spread is closing out 1.25bps wider at -84.6bps after carving out an intraday range of roughly -87bps to -81bps.
And in SOFR-space, red SOFR futures are anywhere from 2 to 6 ticks firmer while fed fund futures are now showing a 25.1% probability of a 25bps hike on Wednesday compared to 30.5% priced in on Friday. And in SOFR swaps, spread narrowed across the board amid below average activity in the 2y-30y sector after today’s batch of front-loaded IG deals priced against a modestly buoyant risk backdrop (Dow +0.56%, S&P +0.93%, Nasdaq +1.53%)
As for today’s auctions, the $40bn 3y note auction tailed roughly 0.2bps to draw a stop-out yield of 4.202% and a bid-to-cover 2.7x. Indirect bidders took down 61.5% while directs claimed 21.7%, leaving dealers with a 16.7% allocation, compared to 13% for the prior auction last month. Meanwhile, the $32bn 10y note auction tailed 1.5bps to draw a stop-out yield of 3.791% and a 2.36x bid-to-cover ratio. Indirect bidders took down 62.3% while directs claimed 19.9%, leaving dealers with a 17.8% allocation, compared to a 13% for the prior auction last month.
As for tomorrow’s May CPI release, Bloomberg consensus is looking for a headline print of +0.1% MoM/+4.1% YoY and a core print of +0.4% MoM/+5.2% YoY. As for the all-important NSA, consensus is coming in at 304.075 while the NSA fixing itself traded today at 304.16. But as one source cautioned, “the devil, as always, will be in the details.” Thus, for a more granular preview of the CPI print, please see Total Derivatives.
Elsewhere, looking ahead to this week’s FOMC decision, strategists at BofA believe that the Fed will maintain the target range for the federal funds rate at 5.0-5.25% at the June FOMC meeting, though they believe this to be a “close call”. While incoming data point to resilience in activity and stickiness in inflation, the bank believes that “the Fed appears to want additional time to monitor policy lags and regional bank stress.”
That said, BofA reckons that “the Fed seems to be aiming for a difficult-to-orchestrate hawkish hold” as “a hawkish hold seems difficult because actions speak louder than words.” If truly hawkish, why not hike? BofA highlight the following:
- ”…Macro data has been resilient & inflation is too high. Concerns over bank stress likely factor heavily into their thinking. The Fed should also be aware of the UST bill supply surge & knock-on upward pressure for money markets.
“…The June FOMC meeting is unlikely to materially impact near-term pricing for July but could assist in reducing the extent of cuts in '24. The median dot in '23 will likely shift higher 25bps, consistent with the risk of a potential hike at an upcoming meeting & leaving July pricing around 15-20bps. Market pricing of cuts in '24 is more at risk; FFZ3-FFZ4 has barely moved despite material pricing out of cuts in '23. A more careful Fed today lowers risks of hawkish policy mistake; higher for longer outcomes & near-term bear flattening risks could rise.
“…Recent surprises from the BoC & RBA remind that a June rate hike can't be ruled out. Historically, the Fed hasn't surprised with hikes; our prior analysis suggests ‘the Fed has typically raised rates only when fed funds futures were pricing at least 80% odds of such an action the day before a meeting’. A hot CPI will be required to consider a surprise.
“…Finally, we expect no changes in Fed administered rate setting, including ON RRP rate or per counterparty caps. We remain highly convicted that ON RRP use will fall organically with upcoming UST bill supply & without the Fed acting to "push" cash out. ON RRP hasn't moved much with bill supply post debt limit; we expect that it eventually will.”
Currently, SOFR swaps – 2s -10.125bps (-0.625bps), 3s -16.875bps (-0.125bps), 5s -22.75bps (-0.375bps), 7s -29.375bps (-0.625bp), 10s -27.75bps (-1.375bps), 20s -65.625bps (-1.375bps), 30s -69bps (-1.125bps).
- United Airlines priced a 9.5y $1.32bn EETC Pass Through Certificates via Citi, CS, DB and GS. A3/A. Priced at 5.80%.
- Global Atlantic Fin Co. priced a $500m 10y deal via GS, JPM, RBC and WFS. Baa2/BBB-/BBB. Priced at +450bps.
- Met Tower Global Funding priced a $450m 3y FA-backed benchmark via BofA, JPM, TD and WFS. Aa3/AA-/AA-. Priced at +120bps.
- Cox Communications priced a $500m 5y and $500m 10y benchmark via Citi, JPM, MUFG and WFS. Baa2/BBB/BBB+. Priced at +155bps, +197bps.
- Aviation Capital Group priced a $500m 7y benchmark via CA-CIB, JPM, KEYBCM, MIZ and WFS. Baa2/BBB-. Priced at +273bps.
- Extra Space Storage priced a $450m 7y deal via BMO, TD and WFS. Baa2/BBB. Priced at +185bps.
- HSBC priced a $2bn 11y N10 Sub Tier II note at USTs +280bps. Self-led.
- Intesa Sanpaolo priced a $1bn 10y and $1.5bn 31NC30 deal via Barclays, BofA, GS, HSBC, Intesa, JPM, MS and TD. Priced at +290bps, +390bps.