USD Swaps: USTs come off lows; NFP ahead; Short 2y spread view  

Chart and prices 12 Aug 2020
USTs are off the lows of the day while spreads drifted off the post-supply pricing lows. BNP Paribas looks to short the 2y spread.

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  • USTs come off lows; NFP ahead; Short 2y spread view  

  • New issues


    USTs come off lows; NFP ahead; Short 2y spread view  

    Treasuries have rallied off the earlier lows with UST yields last 4.8 to 11.7bps higher on the day, after seeing an up to 17bps rise earlier, with the 2y note yield hitting 5.118%. The 2y note yield is now back under 5% at 4.995% or 4.8bps higher on the day while the 10y note yield is last 4.039% or 10.5bps higher on the day in yield. 2s10s is 6bps steeper at -95.8bps while 5s30s 3.5bps flatter at 35.7bps. Equities closed lower (DJIA -1.07%, S&P -0.8% and Nasdaq -0.82%).


    The meltdown in USTs seem to be exacerbated by long positions paring, suggested one source, and though the other data were strong, the ball got rolling with the strong ADP report, but “ADP hasn’t been that reliable of an indicator for non-farm payrolls,” the source pointed out. Thus, should NFP come out around expectations, the source wondered if the market manages to rally back from the recent lows.  


    Swap spreads came off the intraday lows this afternoon, with spreads earlier weighed down as issuance priced amid higher than average volumes. On the issuance side, just over $7bn priced today, led by SMFG’s large $4.3bn 6-part. Week to date now stands at $12.08bn for just two days of supply.  


    Looking at the front end of the spread curve, analysts at BNP Paribas find that “investors have focused on front-end spreads in anticipating the glut of bill supply and liquidity drain” and “although tighter, we think that spreads have further room to reset in coming months.” To be sure, the bank notes:


      ”Defensiveness by MMFs, resumed deficit growth, and QT should probably boost supply that needs to be absorbed by the other market participants.


      Commercial banks had been a significant net buyer following the Covid shock, but a shift towards deposit outflows has been offset by a reduction in bank securities portfolios.


      Moreover, the cessation of negative interest rate policy in Europe and likely continued liberalization of BoJ YCC should support reduced foreign appetite for US debt.


      Further, in the event USDJPY comes under further appreciation pressure, the risk of MoF intervention may be a near-term catalyst for spread tightening pressure.


    Thus, “this leaves it to other investors such as dealers, households, and (at the long-end) pensions will be relied upon to absorb the added supply,” BNP Paribas argues. As a result, based on its liquidity outlook and the shifts in the UST buyer-base, the bank sees scope for 2y spreads to tighten further.


    Specifically, BNP Paribas looks to short 2y SOFR swap spread with an entry level od -7.5bp and target a take profit level of -16bp ans stop loss at -3bp. The bank calculates carry and roll down at +0.4bp/month.



    2s -8bps (unch), 3s -14.125bps (-0.125bps), 5s -22bps (-0.25bps), 7s -27.375bps (+0.125bps), 10s -25.125bps (+0.625bps), 20s -63.375bps (unch), 30s -66.5bps (-0.125bps).



    New issues  


    • SMFG launched a $4.3bn 6-part ($850m 3y fixed, $400m 3y FRN, $750m 5y, $650m 7y, $650m 10y and $bn 20y). Leads SMBC Nikko, GS, Jeffries, JPM and Citi.  A1/A-/A-. +120bps, SOFR +130bps, +145bps, +165bps, +175bps, +195bps.


    • Toyota launched a $1.5bn 3-part ($500m 3y, $500m 5y and $500m 10y sustainability benchmarks). Leads JPM, BofA, Citi and MS.  A1/A+.  +58bps, +75bps, +108bps.


    • Deutsche Bank NY priced a $1.25bn self-led 4NC3 fixed-to-FRN benchmark. +245bps.


    • IFC priced a $2bn 5y benchmark via BM O, Bo9fA, JPM and Nomura.  Aaa/AAA.  SOFR + 33bps area.