USD Swaps: Summer fuelling reactionary moves

Yo yo
Weak PMIs from across the Atlantic spawned strong EGB rallies and a decent move lower in UST yields ahead of its own PMI release. Deutsche eyes hikes.

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  • Summer fuelling reactionary moves

  • Deutsche: Fed still two hikes from peak… at least

  • New issues:


    Summer fuelling reactionary moves

    Very weak French PMI data first thing this morning started a sharp pan-market fixed income rally today. It was followed 5 minutes later by almost as weak German PMIs, which in turn was followed an hour later by slightly weak UK PMI data, all of which seems to have nailed on a decent rally (6bps in 10y USTs, 12bps in Bunds and 8bps in gilts), at least until US PMI data comes out this afternoon.


    In Treasuries the curve move has been a slight bull-flattening in 2s/10s and bull-steepening in 10s/30s and one London-based UST trader said that there is little new about the moves seen today, although there may have been added seasonal zip in the response to PMIs.


    “Generally USTs have been stuck in an exaggerated range for the past one-and-a-half months or so, and with June beginning to wind down and full-on Summer around the corner, liquidity is lending itself to greater exaggerations in both directions.”


    “Yesterday,” he continued, “Treasuries sold off quite a bit on little in the way of new news from (Fed Chair) Powell (he reiterated that rates may go higher, see Deutsche below), so this bounce isn’t that surprising, trading always gets a bit reactionary when liquidity drops.”


    So if US June PMIs follow their European equivalents and undershoot forecasts (Manufacturing 48.5, Services 54.0, Composite 53.5) then a further rally should see the day out.


    Needless to add perhaps, but the trader said that activity so far today in USD fixed income is extremely light but the volatile nature of this week, even if it is volatility within a range (10y UST yields have stayed between 3.57% and 3.82% since May 17), means that traders will be weary and happy to walk away from their responsibilities when today is done.


    As the US fires up for the week’s last roll of the dice, USTs are holding on to their gains and swap spreads are mostly wafting higher. Currently the 2y UST yield is -5bps at 4.75%, 5y is -7bps at 3.98% and 30y is -5bps at 3.82%. And in ASWs the 2y is -0.25bps at -10.5bps, 5y is +0.25bps at -21.5bps, 10y is +0.5bps at -26.25bps and the 30y is +0.125bps at -65.75bps.


    Deutsche: Fed still two hikes from peak… at least

    At the end of a week in which Fed Chair Powell rattled USD fixed income by warning the Fed may have to hike more, strategists at Deutsche Bank agreed with his view, which is counter to some who still believe US rates have peaked, and warned the Fed will hike at least twice more.


    Deutsche said that last week’s ‘no change’ vote by the FOMC came as the Fed strives “to identify the sufficiently restrictive monetary policy stance that will allow them to achieve their dual mandate objectives over time. This stance has proven elusive, as even 500bps of rate hikes has so far not clearly dented growth momentum, nor has it delivered confidence that inflation is on a path back to target.”


    Deutsche tries to assess how close the Fed is to finding the right peak. It said that “The most compelling case for the Fed being near sufficiently restrictive is market pricing. Relative to history, the peak policy rate priced relative to neutral and the pace of rate hikes is priced to deliver as any since Volcker, including the late 1980s when inflation was also above 5%.”


    “Based on another approach comparing the 2y and 5y5y TIPS rates, the current gap is as high as its been since 1980. While it’s difficult to say with confidence these imply enough restraint is currently priced, it suggests we’re in the ballpark. On the other end of the spectrum, the Fed is clearly not restrictive enough versus a variety of policy rules, which on balance imply that the policy rate could need to (possibly meaningfully) exceed 6%.”


    Taken together, says Deutsche, “we find that the policy stance is likely nearing a sufficiently restrictive level, which could plausibly be achieved with one or two more rate hikes. But uncertainties remain. Greater confidence in this conclusion would be found in near-term evidence inflation is moderating and that the tightening in bank lending conditions is restraining activity. Without these developments, more Fed tightening could well be needed.”


    New issues:

    • BBVA Mexico yesterday priced a $1bn 15y NC10 sub at 8.45% via BBVA, Credit Agricole, Goldman and JPM.


    • Dallas-based restaurant group Brinker International last night priced a $350m, July 2030 NC3 bond at USTs +433bps via BofA, JPM, Truist Securities and Wells Fargo.