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Claims shift tide for USTs; Rates mid-year update – Higher & Flatter
Amid this morning’s batch of largely consensus to better-than-expected data (i.e. retail sales, import prices, Empire manufacturing, Philly Fed, business inventories), a weaker-than-expected jobless claims print (+262k versus +245k Bloomberg consensus) stuck out like a sore thumb. Indeed, today’s print marked the second consecutive elevated number following last week’s number, which was the highest in well over a year.
And with the employment data/outlook being directly within the Fed’s mandate, investors zeroed in on this weak print today with yesterday’s hawkish FOMC pause still very fresh on many minds. Indeed, as soon as the print hit the tape, a nascent bear-flattening in the Treasury market quickly morphed into a belly-led bull-steepening move that even managed to shrug off EGB weakness across the pond after the ECB raised rates by 25bps today (see Total Derivatives).
And with the today’s close approaching, the benchmark 10y note yield is last 6.8bps lower at 3.718% after hitting a pre-data peak of 3.835% this morning. On the curve, the 2s10s spread is going out 2.15bps narrower at -92.75bps after carving out an intraday range of -95.86bps and -90.8bps. Meanwhile, SOFR futures are ending 6 to 8 ticks firmer on the day in the reds while SOFR swap spreads are mixed with the spread curve steepening amid below-average activity overall. In the backdrop, a handful of IG names tapped the market today amid another buoyant risk tone (Dow +1.26%, S&P +1.14%, Nasdaq +1.15%).
More broadly, analysts BofA recently pushed out the timing of their mild recession call, penciled in more Fed hikes and pushed out the timing of rate cuts. However, beyond these tweaks in its US macro views, the bank also updated key views across more detailed parts of the US rates landscape, including supply/demand, US front end, spreads, inflation, & vol. Below, BofA reflects on these changes in its updated rates forecasts & views:
- ”…Supply / demand: Debt limit resolution has opened UST supply flood gates. We expect $2tn of net UST issuance from Jun through Dec '23. Over this period bill supply will rise $1.4tn & coupon supply $650b. Coupon sizes higher in August….We are more confident in who will buy the bill vs coupon supply. ON RRP will provide a meaningful backstop to bill rates. Coupon supply does not have as natural of a buyer. USTs will likely need to cheapen to incentivize longer-dated demand.
“…Front end: US bill supply + increased FHLB issuane will result in upward pressure on money market rates vs OIS. Money market cheapening will draw cash out of Fed ON RRP facility as rates become sufficiently attractive. The supply surge is expected to place upward pressure on dealer balance sheets & term repo. We worry higher dealer balances will result in tighter USD funding pressure in CP & cross currency.
“…Spreads: despite money market cheapening, 2y spreads can serve as an attractive carry trade for investors who have low marginal costs (repo haircuts, initial margin). Ongoing bank liquidation is still negative for 2y spreads, but if they stay in a range of -15bp to 0bp the carry may be attractive. Longer dated spreads have tailwind of less coupon supply vs '22 but demand concerns & ongoing Fed QT headwinds. Higher dealer balance sheet constraints are a key risk for spreads.
“…Inflation: 1y inflation swap seems low & does not reflect inflation persistence that would likely underpin need for additional hikes and potential way to hedge risk that hiking cycle is not over. Out the curve 30y real yields still seem far from fundamentals but economic strength and supply/ demand imbalance near term risk. For longer term investors we think that as the economy cools and conviction in cuts increase, 30y real yields have room to normalize closer to 100-125bps.
“…Vol: We expect the vol grid to continue to normalize gradually over 2H23 (expected ranges by 4Q23: 120-130bp for 1y1y, 100-110bp for 1y10y, and -5 to 5bp for the 1y10y vs 1m10y vol spread). Soft landing or scenarios where the recession continues to be priced at a 6m rolling horizon support carry strategies. We find these more attractive in risky assets, but also see the current context as justifying hedging wide tails. i.e., hard landing and reacceleration scenarios.
“…Asset allocation: Our updated macroeconomic outlook justifies a slight upgrade of portfolios risk profiles, albeit still within transition type portfolios (closer to balanced allocations). These imply still at best the potential for a convergence to 3% steady state levels for 10yT.”
Currently, SOFR swaps - 2s -9bps (unch), 3s -12.625bps (-0.625bps), 5s -21.375bps (+0.875bps), 7s -27.625bps (+1bps), 10s -26.125bps (+0.75bps), 20s -62.875bps (+1.375bps), 30s -65.875bps (+1.125bps).
- South Korea’s NongHyup Bank plans a 5y USD Social bond after investor meetings on June 19th. Via BNPP, BofA, Credit Agricole, MUFG, SocGen and UBS.
- Hyundai Capital America is meeting investors on Jun 15. Leads are Citi, CA, HSBC, Mizuho, SocGen and SMBC Nikko.
- Univar (Windsor Holdings) plans a $1.8bn 7y Nc3 secured bond at around 8.5%. Leads are Apollo, BMO, BNPP, CS, FTG, HSBC, JPM, Mizuho, RBC, TD and WFS.
- PECO Energy priced a $575m 10y FMB deal via BofA, PNC, RBC and SMBC. Aa3/A/A+. Priced at +120bps.
- Bank of China New York priced a $500m 3y green deal via BNY Mellon and JP Morgan. A1/A/A. Priced at +45bps.