USD Swaps: Spreads tighter; Reactions to the Fed

• Steeper and tighter so far

• Reactions to the FOMC: Banks

• New issues

Steeper and tighter so far

The ECB (see Total Derivatives), initial claims and second quarter GDP data are up next with the UST curve a touch steeper in early trading on the back of further post-Fed gains for the front end, with the 5y just off yield lows at 4.10% (-2bps). Swap spreads are tighter led by the long end although outright volumes remain below average so far with a $35bn 7y auction on the slate. Spreads are -7.50bps (-0.25) in 2y, -20.125bps (-0.25) in 5y, -25.50bps (-0.25) in 10y and -64.75bps (-0.50) in 30y.

Reactions to the FOMC: Banks   

Banks diverge slightly in their reactions to the FOMC meeting, with some (Barclays) still expecting another hike in late 2023 while others (BNPP and DB) reckon that rates have probably peaked. In the market, SOFRs are little-changed so far today after rallying by 6-11 ticks in the reds yesterday, while the very front end of the OIS curve is pricing in roughly a 20% chance of a 25bps hike in September.

• BNP Paribas: “Be somewhat patient before engaging with end of cycle/recession type trades for several reasons. First, the burden still lies with the hard/labor market data to send a clearer signal to give the market confidence that tightening is in fact done. From there, the bar to pricing imminent cuts may still remain somewhat high, in our view, given the Fed's stated wariness around the risks of prematurely easing. This may make it hard to see the US rates curve outperform steepening already implied in the forwards. Second, forward yields are not sufficiently elevated to offer clearly asymmetric risk/reward to owning duration at this stage of the cycle. In fact, we see room for intermediate and long-end yields to drift higher until there is a stronger sign that labor market weakening is taking hold. Finally, on a near-term horizon, the risk of a BoJ YCC adjustment could be a catalyst to higher yields globally.”

   

• Barclays: “Powell caught our ears by noting that the FOMC will make a judgment about whether to cut rates ‘a full year from now’.  With fed funds futures pricing in some likelihood of cuts as soon as January 2024, this is an explicit signal of the committee's resolve to keep rates at a restrictive setting well into next year, thereby leaning against further inversion in the yield curve…We expect the FOMC to hike another 25bp in November, hold through June, then make four incremental cuts to the funds rate from July-December 2024…We view outcomes in which the FOMC hikes two more times to be somewhat more likely than outcomes in which July's hike is the final one.”

   

• Deutsche Bank: “We continue to see today's hike as the last of the cycle, as somewhat faster disinflation coupled with a softening in growth and the labor market – conditions Powell noted are necessary to consider pausing – will become more evident in the coming months. That said, with rising prospects for a soft landing, and the potential for some uplift in inflation prints later this year, Fed officials are likely to be  reluctant to back away from their tightening bias.”

New issues

• Arconic yesterday priced a $700m 7y NC3 secured high yield at 8% via Apollo, BMO, Citi, Citizens, FT, JPM, Miuho, StanChart, TST, TD and WFS.