USD Swaps: Softer, but small moves; Talking tactics

Core markets slightly softer after JGB moves

After a gently dovish end to a slightly bearish week that saw 10y yields rise 11bps Mon-Fri, price action in Treasuries and across core bond markets has been slightly soft and super-cautious so far today. 10y UST yields are broadly in line with their Bund and gilt peers in being +2.5bps at 3.975%, while 2s/10s is about 0.75bps steeper and 10s/30s is 0.5bps flatter.  

The long-end is expected to come under pressure in the next couple of days ahead of Wednesday’s quarterly Fed refunding announcement that is forecast  to see a rare increase in coupon supply to $102bn from $96bn. But again, this is not quite market-critical at this stage of the week.

If there has been a mood-setter for slightly soft bond markets today it was the surprise overnight announcement from the BoJ (again!) that it would make a rare, and modest, intervention to buy $2bn-equivalent of 10y JGBs. It succeeded in dragging the 10y yield below 0.6% and capped a weakening in JGB s that could have a had a more negative impact on awakening bond markets than it did. Currently the 10y JGB yield is +5.5bps at 0.595%.

In dollar swap spreads today the 2y is -1.25bp at -7.75bps, 5y is -0.25bps at -20.25bps, 10y is -0.5bps at -26bps and the 30y is -0.5bps at -65.5bps as issuance arrives from Lloyds and Santander, among others.

While Summer trading conditions may have now bedded down for the next few weeks, the start of August is nonetheless a busy time in terms of US data, including the biggest headliner of them all, non-farm payrolls.

Friday’s July NFP is forecast to see a 200K rise in payrolls, versus 209K in June, although strategists at BNPP this morning warned that “a weaker-than-expected print (increasing risks for a recession or a less-soft landing), could prompt some risk-off feel, and perhaps then some unwinds in the long-loved carry trades.” 

But with an eye on last week’s string US GDP and labor market data, strategists at Barclays strategists are more hawkish. They reckon that “the Fed is much more likely to deliver an additional hike before year-end (than not), in light of the robust activity. Indeed, we sense FOMC skepticism regarding the sustainability of recent downside inflation surprises while seemingly being more convinced by the resilience of activity.”

Before then though, there is JOLTS and ISM data on Tuesday and only two Fed speakers are currently scheduled to speak this week: the Chicago Fed’s Austin Goolsbee (again), already widely acknowledged as the FOMC’s most dovish component, followed later in the week by Richmond Fed President Tom Barkin.

Citi: Time to trade tactically

Looking at the post-FOMC trading environment, strategists at Citigroup said today that the time has come for pragmatic, rather than conviction, trading. Citi says that “it’s a tactical trading environment for rates. Longer term, we continue to like the combination of long duration expressed via real yields coupled with a short vol bias. Our view continues to be that there is limited pass-through from the BoJ’s YCC tweaks on the Treasury curve.”

 Following what was an active global central bank week, says Citi “looking forward, we see opportunities in US rates markets driven by two factors 1) lower inflation and 2) a deferral of recession expectations. One more rate hike from the Fed is a possibility, but in any case, we’re at the tail end of the hiking cycle. Be careful not to get distracted by the noise about the BoJ – the decision there is nuanced and the big capital shifts by investors have already largely been made.”

“First,” asks Citi, “where do we go from here on fed funds? Our econ call is for a skip at the next meeting followed by a hike at the November meeting, albeit with a higher threshold. Forward guidance has been purposefully weakened. Practically, in our view, this means that the rates market is likely to sell-off into payrolls and rally into CPI. It is a tactical trading environment. The broader path for rates is lower, but we’re concerned by the upside risks to inflation presented by the new tech bubble.”

It concludes that “Long exposure via 5y and 10y real rates fits the current uncertainties in the macro environment. Our recommended core position in duration is long 5y and 10y real yields hedged by short (nominal) receiver swaptions.”

Looking to the new week ahead, Citi says that “Tactically… the risk is slightly bearish into payrolls especially given that unemployment claims have been coming in below consensus expectations recently, suggesting a still strong labor market.”

New issues

• Lloyds Bank has mandated Barclays, HSBC, JPM and Scotia to lead a two tranche 4y NC3 fixed and floating rate bond at around USTs +175bps and SOFR equivalent.

   

• Santander plans a USD 5y and 10y sub bond issue at around USTs +175bps and +325bps respectively. Leads are BofA, Citi, GS, HSBC, JPM, Jefferies, MS, RBC, Stantander, TD and WFS. 

   

• GS Caltex plans a $300m, 5y bond at around USTs +128bps via CA, HSBC, JPM and Mizuho.