USD Swaps: Bearish end to Q2; LIBOR; Sintra and Sinatra

Bearish end to bearish quarter; LIBOR no more

It just wasn’t meant to be like this. The happy Apr-Jun quarter that starts in Spring’s early days and ends in joyous summer was meant to also see major Western economies at, or very close to, the peaks of their respective rate cycles and looking to ease their way back to lower levels amid managed economic soft landings.

Instead, the hawkish engines of rate hike speculation are firing up their engines and returning to the runway, with the BOE leading the way last week, and markets pricing in higher peaks on a daily basis. This month- and quarter-end session has started with more bear-flattening to reflect these hawkish central bank concerns.

Currently the 2y UST yields is +5bps at 4.91%, 10y is +3.2bps at 3.87% and the 30y is +1.6bps 3.915%, while gilts are bear-flattening amid more extreme moves and Bunds are softer in 10y and 30y but little changed in the front-end.

The change of direction this quarter can be easily measured in basis points, with 2y UST yields up 88bps since April 1, 10y +41bps and the 30y +26.5bps. Yesterday’s strong US GDP and employment data ensured that the quarter is ending on a down point for fixed income, and forced JP Morgan to come out this morning and ditch its long-standing strategic long position in USTs.     

So if the short-term hopes of an end to the bear market appear to be over, so too today is LIBOR. After fifty years of being a part of the global financial pipework, initially known only to very rich individuals, particularly investment bankers, it really hit the bigtime with the 2007-08 global credit crunch, and subsequent allegations of LIBOR fixing.

At first considered impossible, it quickly became apparent that LIBOR was eminently fixable, but not in a good way, and it has been on Death Row ever since. After being very much phased out in a complex multiyear process, Bloomberg notes today that about 2.4% of leveraged loans held by CLOs are borrowing on 6-month LIBOR, compared with virtually zero a year ago.  

This shows that there are people who have yet to refinance or amend loan terms and are buying themselves six months to do so at the very last chance saloon. And for some other loans that for whatever reason can’t yet quite be unpicked synthetic LIBOR (SOFR plus a spread) will limp on, but to all intents and purposes, a very useful tool for lending, borrowing and globalization, which became a pariah, dies today. Rest in peace.

At lunchtime in London the 2y SOFR/swap spread is -0.5bps at -7.5bps, 5y is +0.5bps at -22bps, 10y is +0.25bps at -26.1125bps and 30y is +0.125bps at -67.25bps.

SocGen: Regrets? Powell may have a few more in July

Strategists at SocGen looked this morning at recent comments from Fed Chair Powell and suggested that if he is slightly worried now, he may be more so in a month from now.

“’Regrets? I’ve had a few’ Fed Chair Powell joked in answer to a question at the FOMC press conference two weeks ago,” recalls SocGen, “but after this week’s strong data run, including the surprise drop in jobless claims by 26k to 239,000, the Fed might regret having paused in June.”

SocGen warns that “if the payroll data next week and incoming PCE inflation today and CPI in two weeks are all in a similar strong vein, the Fed will wonder why it skipped. The OIS curve is now pricing 21bp at the July FOMC (upper end of the range). Yields are racing higher across the curve in a dramatic finale to 2Q and 1H, with UST 2s closing the gap on 5% and the 10y threatening to return to 4%. The united hawkish front by the ECB, Fed and BoE at the ECB forum in Sintra reinforced the outlook for higher rates for longer. The jump in real rates did not derail equities but gold retreated below $1,900.”

In short, warn the SocGen strategists “an uneasy month could lie ahead in July as we countdown to next US payrolls, CPI and FOMC.”

New issues:

• Howard Midstream Energy last night priced a Jly 2028 NC3y, $550m bond at USTs +473bps via Capital One, CIBC, First Citizens, ING, MUFG, RBC, Regions Securities, SMBC, TorDom, Truist and US Bancorp.

   

• RBC this morning priced a $50m, 5.64%, July 2025 bond at par via Merrill.