USD Swaps: 5y, 10y UST bids persist; JPM FICC; CPPIB

JP Morgan 30 Jan 2023
Traders reported bids in 5y and 10y as a newly confident UST market allowed itself to meander into data. JPM reports a small FICC dip.

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  • 5y, 10y UST bids persist; CPPIB popular; GPIF buys USTs

  • JP Morgan Q2 FICC down just 3% yoy to $4.6bn

  • Barclays: Time for range trading, possible curve-steepening

  • Callables and Formosas: SocGen

  • New issues:


5y, 10y UST bids persist; CPPIB popular; GPIF buys USTs

Despite soft price action compared to EGBs (where Bastille Day has thinned the market out a bit), UST traders said today that the standout flows in their market have been bids, and the overall mood remains upbeat.


One trader said at lunchtime in London that “it’s been very quiet and the most noticeable thing has been a bid to duration. There’s been a particularly good bid in 5y USTs and similar activity in 10y, though it’s hard to see who’s doing that.”


Generally, he added, “mostly though bids are a follow-up from the CPI, since the data the market has bounced off lows and there is a lot more confidence on the long side now, compared to the environment we’ve had for a while where buyers were constantly worried that they were catching a falling knife.”


Looking at supply this week and the trader noted yesterday’s $1.5bn CPPIB deal (see new issues), which he said caused quite a scramble in the market. “It came pretty cheap (at 57bps over USTs) although conversely funding in USD (and swapping to CAD) is quite expensive for the issuer so it didn’t print too much and the deal attracted $4bn of buyers.”


With assets under management equivalent to around $435bn, CPPIB is a pretty big fish, even by the standards of global pension funds, but even it is dwarfed by Japan’s GPIF, the world’s biggest pension fund with assets in excess of $1.4trillion.


It gave the UST market the thumbs up today in its latest investment allocation data released this week. USTs made up 43.3% of its allocation in the year to the end of March, versus 40.8% in the previous year. A rise over that time of 9.2% in the value of the USD versus JPY more than offset the 4.5% drop in UST valuations over that period, likely explaining GPIF’s increased support for the market.


As traders prepare to see if today’s preliminary University of Michigan data can impact their market, USTs themselves were happy to drift in a flattening direction. Currently the 2y UST yield is +3bps at 4.66% (versus 4.95% on Monday morning...), the 5y is +2bps at 3.97%, 10y is +1bp at 3.77% and the 30y is -1bp at 3.90%.  


And in swap spreads the 2y is +0.5bps at -8.5bps, 5y is +0.125bps at -21.5bps, 10y is +0.25bps at -26.5bps and the 30y is fractionally less negative at -66.25bps.


JP Morgan second quarter FICC down just 3%yoy to $4.6bn

JP Morgan shares have risen by 2.5% in pre-market trading after the bank reported a 34% jump in revenue to $41.3bn after the acquisition of First Republic and achieved a 20% ROE. S&P futures are +0.2%.


Briefly addressing recently regulatory proposals, CEO Jamie Dimon said only that, “While we expect material capital changes with the finalization of Basel III and probable changes to come for bank liquidity, we will manage to any new requirements as we have demonstrated in the past.” However, Dimon cautioned that “material” regulatory changes “would likely have real world consequences for markets and end users.”


JPM’s CET1 capital ratio was 13.8% in Q2 2023, its SLR 5.8% and its firm LCR 112%.


In the Corporate & Investment Bank, Fixed Income Markets revenue was $4.6bn, down just 3%yoy, reflecting “lower revenue in macro businesses, largely offset by higher revenue in the Securitized Products Group and Credit.”  


Interest rate risk in CIB was mixed with fixed income VaR (95%) of $57m, up slightly from $56m in Q1 2023 but down from $60m in Q2 2022. 


Equity Markets revenue was $2.5bn, down 20%yoy, compared with a strong second quarter in the prior year. Equity VaR rose to $8m, commodities VaR fell to $12m and FX VaR rose to $12m.


Finally, the comp ratio in CIB slipped to 28%, from 30% in the previous quarter and 29% a year earlier.


Barclays: Time for range trading, possible curve-steepening

In its latest look at the USD fixed income market, strategists at Barclays suggest that the new era of lower inflation lends itself to range trading, rather than outright bullishness on rates, with a possibility of curve-steepening led by long-end selling, rather than front-end buying.


Barclays said that “we believe the combination of soft inflation and robust activity data has raised the likelihood of a soft landing, and the broad market reaction is consistent with that. Equities have rallied, credit spreads have tightened, the yield curve has steepened and rate volatility has fallen. All this suggests that the markets have pared back the tails of the distribution, particularly the rates markets having pared the right tail of aggressive hikes, which has resulted in a bull-steepening.”


From here though, says Barclays “we believe rates markets are likely to be range-bound. A further rally should be limited, as the robust growth backdrop is likely to prevent the markets from pricing in a faster return to neutral policy setting than is already priced in.”


Overall, though, it added, “investors see the likelihood of a soft landing as having risen, expecting the Fed to be less aggressive, given soft inflation data. We continue to believe that the Fed is unlikely to cut as much as is priced in. Hence, any further steepening is more likely to come from higher longer-term rates rather than much lower short-term ones.”


“However,” it concludes, “given the likelihood that soft inflation data continue in the near term, there do not appear to be many catalysts for a repricing. We are therefore turning neutral and would prefer to express the view in conditional space instead.”


Callables and Formosas: SocGen

  • SocGen sold a $50m 10y NC5 fixed callable (non-Formosa). The EMTN matures Jul 2033, is callable once in Jul 2028 and pays a 5.25% coupon. Self-led and announced Jul 13.


New issues:

  • CPPIB Capital yesterday priced a $1.5bn 5y deal at swaps +57bps, versus +60bps IPT. Leads were Barclays, BMO, BofA, CIBC (B&D) and MS.