USD Swaps: Flatter; Fade rate cuts?

Flat salt plane 21 Jun 2021
USTs are flatter as the front end loses ground ahead of Fedspeak and the UoM data. Banks gauge the risk-reward for fading rate cut pricing.

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  • Flatter ahead of Fedspeak and UoM

  • Barclays: Move shorts to fade rate cuts  

  • New issues


Flatter ahead of Fedspeak and UoM

The USD curve is (bear) flattening again with 2s/10s Treasuries down to -96bps (-3bps) and threatening a re-test of -100bps as 2y yields back up to 4.69% (+5bps) and red SOFRs fall by 4-5 ticks. The move comes ahead of remarks by Fed officials Waller and Barkin today plus the Univ. of Michigan data with the UoM sentiment index seen edging up to 60.0 while inflation expectations are expected to fall back by around 10bps to 4.1% for 1y and 3.0% for 5-10y. Stocks continue to gain in the background with Nasdaq futures +0.2% today (and around +32% for the year to date). 


Meanwhile the new issue screens are quiet heading into the long weekend and swap spreads are narrowly tighter with at -9.75bps (-1.25) in 2y, -21.25bps (+0.125) in 5y, -26.25bps in 10y (-0.125) and -66.25bps (-0.25) in 30y. Swap flows are above-average out to 7y but weaker further out. 


Barclays: Move shorts to fade rate cuts  

Barclays strategists this week recommend moving their previously recommended (and profitable) short SOFR position a year further out from SFRZ3 to SFRZ4 (the latter at an implied entry level of 3.65%). Their aim is to fade next year’s cuts: “We believe the market is now being too aggressive in pricing in about 150bp of rate cuts next year, projecting a decline to about 3.6%,” Barclays reckons, with persistent core inflation and the Fed’s cautious reaction function among the reasons for going against 2024 rate cut pricing.


  • “The persistence of inflation, the strength of the economy despite material tightening and the Fed’s approaching further tightening with caution suggests that the modal policy rate at year end 2024 is higher than what the markets are pricing in.


  • “While the Fed’s dots moved meaningfully at the latest meeting, we believe that reflected the reassessment of the economic outlook, not a hawkish shift in the reaction function…While the tail risk of aggressive cuts next year if the economy decelerates sharply still exists, it needs to be balanced with the tail risk of no cuts next year if inflation stays well above the Fed’s 2% target.”


  • “Core inflation has been very persistent…If core PCE inflation next year turns out to be above 3%, the Fed will likely not even deliver the 100bp cuts that it has pencilled in the SEPs, even if it does not continue to hike next year.”


  • “The Fed is being deliberate about further hikes by potentially moderating the pace further (say, from 25bp/meeting to 25bp/quarter), which reduces the risk of overshooting and then undershooting later.”


New issues

  • 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 June 15th. 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.