CPI cements one and done; Beige Book; 10y
Treasury yields are ending the session 6.5 to 16.7bps as today’s CPI print cemented prognostications of a 25bps hike and done in July (futures now see 95% of a 25bp hike in July). The 10y note yield is last 11bps lower at 3.867% while 2s10s is last 2.5bps firmer at -88.3bps and 5s30s 9.6bps steeper at-12.4bps. Equities all closed higher (DJIA +0.25%, S&P +0.75% and Nasdaq +1.15%).
“This was a pretty major number” for CPI highlighted one source. For their part, analysts at BNP Paribas believe that the “relatively cool June CPI report still signaled that non-housing services inflation will likely require a weaker labor market to move appreciably closer to target-consistent level” but “an intensifying downtrend in goods prices should slow the pace of price gains in H2 compared to H1, pulling core CPI inflation down to 3.5% y/y by year-end (from 4.8% currently).” And while the Fed looks set to hike later this month, “the anticipated step-down in inflation should reduce pressure to tighten beyond July,” BNP Paribas reckons. For more analysis of the CPI data, please see USDi.
Elsewhere, in supply, the $32bn 10y reopening tailed a slight 0.2bps versus the 1pm bid side, drawing a rate of 3.857%. Indirects rose (67.7%) while directs were unchanged at 19.9% while primary dealers saw a smaller 12.4% allocation versus the month prior. The 2.53x bid-to-cover was higher.
Meanwhile, the Beige Book this afternoon reported that economic activity “increased slightly” but that overall economic expectations for the coming months “continued to call for slow growth.” Meanwhile employment “increased modestly” with wages rising “more moderately.” On the price side, the Beige Book noted several districts seeing “some slowing in the pace of increase” and price expectations were “generally stable or lower over the next several months.”
Swap spreads meandered higher in the belly while the front end and long end saw spreads narrow, in keeping with the underlying curve move amid overall higher volumes.
Looking ahead, analysts at JP Morgan view front end outright curve views in either direction “as less compelling currently, given two-sided risks to the path of future policy rates.” Instead, the bank focuses on “hedging out front end risks and initiating exposure to hedged trades that carry positively.”
To be sure, JP Morgan believes that “carry is likely to be a useful trading theme in the late-stage hiking cycle higher-for-longer regime that we are likely in.” Thus, with this in mind, the bank’s preferred strategy involving the swap yield curve “is to find trades that are well hedged with respect to the 3Mx3M rate and the Fronts/Reds curve, while offering an attractive combination of relative value and carry.”
“These trades are attractive precisely because (i) they are hedged with respect to the front end, which is currently the most significant risk to curve positions, (ii) offer attractive carry on an outright and risk adjusted basis as well as (iii) relative value given that most of these curves appear too flat currently,” the bank highlights.
Specifically, JP Morgan recommends initiating the 2y fwd 5s/30s swap curve steepeners hedged with a 15% risk weighted long in Sept ‘23 3M SOFR futures and a 35% risk weighted short in Sept ‘24 3M SOFR futures, which offers a high residual and high net carry as a package and lower realized volatility.”
2s -6.875bps (-0.25bps), 3s -12.25bps (+0.5bps)*, 5s -21.75bps (+0.625bps), 7s -27.625bps (+0.875bps), 10s -26.125bps (unch), 20s -63.25bps (+0.25bps), 30s -67.125bps (+0.375bps).
*adjusted for the 0.7bp give
- CPPIB Capital is working on a 5y benchmark via Barclays, BMO, BofA, CIBC and MS. Aaa/AAA/AAA. Price talk: MS + 60bps area. Expected to price this week.
- 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.