USD Swaps: USTs pare gains; Spreads in as Barr tab added up

Fed portico 10 Jun 2020
USTs have pared early gains but the curve remains flatter. Banks add up the cost of Barr's regulatory proposals as the lobbying effort kicks off.

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  • USTs pare gains

  • Spreads tighten as Barr tab added up

  • New issues: ADCB, KfW, JBIC


USTs pare gains

UST yields are backing up from session lows but the curve remains a touch flatter with the 30y now at 4.01% (-2bps) after testing 3.95% this morning. The market is prepping for a $40bn 3y auction today and a packed calendar tomorrow with CPI data, the BoC decision (17 economists in the Bloomberg survey see a 25bps rate hike to 5%, while six expect no change), Fedspeak and the Beige Book all on the slate.


As for risk assets, S&P futures are +0.2% today as earnings season approaches, with the index up almost 15% for the year to date. Still, analysts at Barclays this week suggest caution on stocks from here:


    “Admittedly, the US economy has done considerably better than expected. But p/e multiples have stayed high despite a sharp rise in both policy rates and real rates. The last time the Nasdaq was here in late 2021, US 10y real rates were almost 300bp lower. And while the US equity rally’s breadth has been very narrow, broader indices have kept advancing. Even cash (in the US) yielding over 5% has not made a dent in equity valuations


    “Broader risk assets largely ignored China property news last week; the base metals index was up slightly. We think the weakness was more significant; China property is among the most important sectors worldwide. Any lasting expansion in China is driven by real estate; the sector is also a huge driver of base metals


    “We think the combination of high US real rates and non-US weakness should weigh on risk. The near-term path for risk assets is lower in our view”


Spreads tighten as Barr tab added up

Swap spreads are tightening again as KfW (10y) and JBIC (5y) launch deals and as the traders assess the likely final shape and eventual market impact of the ‘holistic’ bank capital review (see here) announced yesterday by the Fed’s Vice Chair for Supervision, Michael Barr. 5y spreads are -22.125bps (-0.50) and 10y spreads are -26.50bps (-1.00).


Barr’s proposals are wide-ranging and include plans for the G-SIB surcharge, the eSLR, trading risk and operational risk for banks with over $100bn in assets. In summary:


  • G-SIB surcharge: “First, the proposal would measure on an average basis over the full year the indicators that are currently measured only as of year-end. This change would more accurately reflect the systemic risk profile of a firm and reduce incentives for a firm to reduce its G-SIB surcharge by temporarily altering its balance sheet at year end through so-called ‘window dressing.’ Second, the proposal would reduce ‘cliff effects’ in the G-SIB surcharge by measuring G-SIB surcharges in 10-basis point increments instead of the current 50-basis point increments. Third, the proposal would make improvements to the measurement of some systemic indicators to better align them with risk.


  • Enhanced supplementary leverage ratio (eSLR): “I am not recommending changes to the calibration at this time…Some have argued that when banks are close to the eSLR as a binding constraint that it has reduced Treasury market intermediation. The evidence on that is inconclusive. To the extent it matters, the revisions in risk-based capital requirements I discussed today would mean that the eSLR generally would not act as the binding constraint at the holding company level, where Treasury intermediation occurs. To the extent that there are problems with Treasury market intermediation in the future for which the eSLR might matter, the Board could consider an adjustment.”


  • Trading risk: “The proposal would continue to permit firms to use internal models to capture the complex dynamics of most market risks but would not rely on banks modeling certain market risks that are too hard to model…Firms would also be required to model risk at the level of individual trading desks for particular asset classes, instead of at the firm level. The proposal would also introduce a standardized approach that is well-aligned with the modeled approach, for use where the modeled approach is not feasible.


    “These changes would raise market risk capital requirements by correcting for gaps in the current rules. Requiring banks to model market risk at the level of individual trading desks better reflects the observation that correlations across risks can change dramatically in times of stress. Requiring banks to use a standardized approach for hard-to-model risks is appropriate, in light of the weaknesses that were exposed in the 2008 financial crisis, when many firms did not have acceptable models for their risks. In addition, the proposal appropriately charges more capital for positions that are less liquid, in order to better capture the risks of illiquid trading positions.”


  • Operational risk: “The proposed rules would replace an internal modeled operational risk requirement with a standardized measure. The proposal would approximate a firm's operational risk charge based on the firm's activities, and adjust the charge upward based on a firm's historical operational losses to add risk sensitivity and provide firms with an incentive to mitigate their operational risk.”


Lobbying against proposals has already commenced. SIFMA (link) was among the first out of the blocks warning that the plans will increase capital for banks’ trading activities by “almost 60%”. SIFMA added that “We fail to see the rationale for such an increase” and warned that, in combination with other planned regulatory changes, the proposals imply double counting similar risks. JP Morgan CEO Jamie Dimon is due to present his bank’s second quarter results on Friday, along with Citi and WFS. His reaction will be interesting...   


New issues: ADCB, KfW, JBIC

  • ADCB plans a USD 5y at around Treasuries +130bps via ADCB, Barclays, DB, ENBD, JPM (B&D) and Miuho.


  • KfW plans a $TBA 10y Global. Leads BMO, BNPP and Citi. Swaps +45bps.


  • JBIC plans a $1.5bn 5y Global. Leads are Barclays (B&D), BofA, Goldman and Daiwa. A1/A+. Swaps +69bps.


  • Korea Hydro & Nuclear Power is preparing a USD Green 5y in the region of Treasuries +120bps. Via BofA, Citi, CA, SocGen and StanChart.


  • Hanwha Q Cells Americas plans a guaranteed USD 5y Green Bond after investor meetings arranged by BofA, Citi, CA and KDB starting on July 12. 


  • TD Bank yesterday priced a $3.5bn 3-part ($1.8bn 3y fixed, $450m 3y FRN and $1.25bn 5y). Leads are Citi, GS, NatWest, StanChart and TD Sec. A1/A/AA-.  +98bps, SOFR +108bps and +128bps.