USD Swaps: Drifting back lower; 5y TIPS ahead

Drifting back lower post another CB hike; 5y TIPS ahead  

Central Banks continued to show their teeth, with the UK’s BOE the latest CB to raise rates more than expected – this time a 50bps hike. Meanwhile Powell stated “there’s a little further to go rate hikes” in his second day of testimony, today facing the Senate Banking Committee. Treasury yields are leaking back to the lows of the day currently, with yields last up to 6.5bps higher, led by the belly.

The 10y note yield is last 3.787% or 6bps higher on the day while 2s10s is seeing a 2bps gain to -98.2bps – and should this hold, it would be the first steepening foray for 2s10s in nearly a week and a half (albeit very modest). Meanwhile 5s30s is 1.3bp tighter at -16.25bps.

Swap spreads have continued to narrow across the board from this morning amid low volumes. Overall, swap spreads have remained rangebound and seen modest moves of late, sources note. As for corporate supply, Nasdaq has announced its widely anticipated $TBA 5-part.

In other supply the $19bn 5y TIPS reopening comes at 1pm – the same size from the reopening in December. Analysts at JP Morgan preview the auction:

The last 5y TIPS auction in April “stopped 0.5bp through pre-auction levels, as end-user demand declined 2.1%-pts to 89.8%, the lowest since December 2021. Auction allotment data show that foreign investors declined 5.3%-pts to 13.0%, while investment manager demand rose to 3.2%-pts to 75.9%.”

 

“Since the last auction, 5y real yields have increased 43bp net of carry to near their highest levels over the past year and about 80bp above their YTD lows reached in early April.”

 

If yields remain near these levels, the auction “will likely clear at the highest yield since October 2008.” Meanwhile “breakevens are roughly 3bp narrower net of carry and are trading near their tightest levels over the past two years.”

 

On a relative basis, 5y breakevens “have underperformed versus commodity prices and credit spreads over the past three months and appear roughly one standard deviation cheap...”

 

At current valuations TIPS breakevens “appear compelling…given continued economic resilience, a market-implied inflation trajectory which is somewhat below our forecast, and an attractive carry profile.”

 

While last week’s CPI report “illustrated some further signs of slowing, the 3-month run rate of core CPI inflation remains elevated at 5.0%.”

 

Overall, JP Morgan believes the auction will be “digested smoothly… with outright and relative valuations looking cheap for both real yields and breakevens, core inflation still elevated, and TIPS carry still positive.”

2s -10.75bps (-0.25bps), 3s -12.5bps (-0.125bps), 5s -21.875bps (-0.375bps), 7s -29bps (-0.75bps), 10s -27bps (-0.375bps), 20s -63.875bps (-1bps), 30s -66.25bps (-0.5bps).

New issues  

• Nasdaq plans a $TBA 5-part (2y, 5y, long 10y, 30y and 40y) to fund its acquisition of Adenza. Leads are BofA, Citi, GS, JPM, MS, Nordea and SEB. Baa2/BBB. Price talk +125bps, +170bps, +200bps, +240bps and +255bps areas.

   

• BBVA Mexico is working on a $TBA 15y NC10. Leads BBVA, CACIB, GS and JPM. Baa3/BB. Price talk 8.75% area.

   

• Brazil’s Cosan is preparing a USD 7y NC3. Leads are Bradesco, BTG, Citi, ITABBA, JPM, MS, Santander and UBS. Price talk high 7%.