USD Swaps: Flattening meanders on; BNPP butterfly

Flattening meanders on

With enthusiasm for trading on this token period of July 4 holiday trading conditions running at low levels, USTs stuck to what they know best at the moment, and flattened, led by the front-end. At lunchtime in London the 2s/10s curve was 2.5bps flatter after 2y yields had risen 1.5bps to 4.91%, reaching -108.3bps - having earlier in the session hit -110bps, just shy of its multi-year flattest record of -110.9bps.

In the long-end 10s30s was -0.5bp, giving 10s30s a relatively juicy curvature of +2bps.

Across markets and USTs are benefiting from deep-rooted apathy to outperform other major fixed income markets. Bunds are +6bps in 2y, and anyone who had filled their basket-cases with short-dated gilts at quarter-end on Friday will be sad to see 2y yields there up 12bps at the time of writing.

In the 10y sector gilts are 4.5bps higher versus 3.5bps in Bunds and in 30y both countries see their benchmark yields up by about 1bp.

The sharp flattening of 2s10s curves in all three markets tells its own story very clearly. With the Fed, ECB and BoE all engaging to varying degrees in coordinated misery in regards to their rate messaging, markets are continuing to reprice hike risks.

Meanwhile our friends and partners in the Saudi and Russian oil sectors have announced oil supply cuts over the weekend that saw benchmark oil futures prices spike about 2% at the opening this morning, doing little to assuage broad-based inflationary concerns.

In short, this first session of the post-LIBOR world feels doesn’t yet feel like a happier place, but hopefully this is just the canny collective market brain cleverly flattening curves and punishing front-ends in a strategic move aimed at cashing in on the great late-Summer/Autumn Inflation collapse. Right?

And in SOFR swap spreads today the curve was less negative/more positive at all key points, reflecting amongst other things, the lack of USD issuance on this semi-holiday Monday. The 2y is currently +0.5bps at -7.75bps, 5y was +0.125bps at -21.75bps, 10y was +0.25bps at -25.5bps and 30y was +0.375bps at 66.25bps.  

BNPP: Pinning hopes on butterfly

Strategists at BNPP took a look at what might hopefully be a quiet and dull few days for USTs  (although ISM data today will be closely watched and Fed minutes on Wednesday and NFP on Friday may have other ideas), and managed to come up with a recommendation for the week ahead.

BNPP notes that “Treasuries flattened throughout (last) week (5s30s: -12bp) with the front-end 15bp cheaper after Powell said consecutive rate hikes at future meetings are not off the table and Q1 GDP was revised to the upside to 2%. We believe 5y5y still has a ways to go to converge towards our ‘anchor’ of potential nominal growth (4.1%).”

It concludes by saying that “we see potentially more upside left for intermediate and long-end yields due from more balanced (less negative) inflation risks, more supply coming in, and the potential for less appetite from foreign investors as their domestic rates potentially become more attractive. Therefore, we favor a 1y5y5y mid-curve payer butterfly targeting a 50-60bp rise in the forward rate."