USD Swaps: 10y back above 4%; Soft landing skeptics

Dollar market crash down line chart 13 Jun 2022
USTs and global fixed income are lower ahead of the data and swap spreads are narrowly mixed. Banks mull the chances of a soft landing

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  • 10y back above 4%; Spreads mixed

  • Soft landing or hard stop? Banks

  • New issues


10y back above 4%

A selloff in global fixed income (see Total Derivatives) has added to the early pressure on USTs ahead of the JOLTS (consensus is for a dip to 9600K from 9824K previously) and ISM data (consensus is 46.9 versus 46.0). With the belly of the curve leading the decline, the 10y note is 4.02% (+7bps) while SOFRs are 2-4 ticks lower in the reds. In swaps, spreads are narrowly mixed in summery volumes across most of the curve except the 30y bucket. Spreads are -8.00bps (+0.125) in 2y, -20.75bps (-0.25) in 5y, -26.25bps (-0.125) in 10y and -65.00bps (+0.25) in 30y.


Soft landing or hard stop? Banks

With the S&P near its yest to date high, banks continue to be split this week between those seeing further gains for risky assets as the path of least resistance (e.g. Barclays) versus those more concerned about equity valuations and skeptical about hopes for a US soft-landing (e.g. JP Morgan).


Barclays makes the case for staying long risk citing earnings, stocks’ resilience and an approaching reduction in event risk:   


    “EPS growth is holding up a bit better than consensus…(Equity) positioning still doesn’t seem excessively bullish, but the tailwind from underweights should dissipate


    “All year, equity markets have shrugged off hurdles, including higher real rates and aggressive central banks. The growth data, especially in the US, has been better than expected, and now inflation is improving too.  Multiples have seem stretched for a while for large US tech firms, but there isn’t an immediate catalyst for a reset


    “With central banks and key data (US payrolls) out of the way by the end of this week, market volatility should stay low. And we believe the BoJ-related bond move is in the rear-view mirror, as we also saw in prior episodes such as last December. The path of least resistance is still for a further rise in asset prices; we stay overweight risk for the second straight week.”


Still, even Barclays seems wary of the low level of equity vol with the VIX at 14.1 (-0.5) today after getting as low as 12.7 last week. Consequently the bank suggests positioning for some convergence in equity and rates vol:


    “VIX at 13 has led some to draw parallels vs. 2017; however, it seems premature given equity vols were lower for much longer back then, and the disagreement among assets, between single stock & index, and across regions is much larger today; expect rates & equity vol to converge as the soft landing solidifies.”


Elsewhere, JP Morgan doubts both hopes for a soft landing and the level of equity valuations and in rates, it prefers to remain long 10s/30s steepeners: 


    “Positive news on growth and inflation are fuelling optimism for a soft-landing scenario in which inflation returns to target, providing space for developed market central banks to ease. We remain skeptical of this outcome, however, anticipating the inflation decline to prove incomplete, leaving restrictive policies  in place that should increase private sector vulnerabilities and end the global expansion.


    “Equity valuations (multiples) are not pricing a soft landing, but rather a continued expansion (no landing) and simultaneous monetary easing (reduction of interest rates and/or QE). With no interest rate cuts in sight, ongoing QT and our base case for macroeconomic slowdown, multiples appear too high.


    “(Treasury) valuations no longer look very rich against our fair value model and with the bar for another Fed hike this fall having risen somewhat, the backdrop for adding duration has improved significantly. However, we remain neutral on duration given investor positioning remains near its longest levels over the past 5-10 years. We keep 10s/30s steepeners.”


Callables and Formosas

  • Merrill Lynch sold a $80m 10y NC4 fixed callable Formosa. The EMTN matures Aug 2033, is callable annually from Aug 2027 and pays a 5.5% coupon. Leads are Cathay, KGI and Yuanta. Announced Jul 31.


  • Goldman Sachs sold a $15m 15y NC2 zero coupon callable (non-Formosa). The EMTN matures Aug 2038, is callable annually from Aug 2025 and has an estimated IRR of 5.00%. Self-led and announced Aug 1.


New issues

  • Booz Allen is preparing a USD 10y at around Treasuries +240bps. Leads are BofA and JPM. 


  • Qatar Islamic Bank plans a USD 3y Sukuk via HSBC, Qinvest (B&D) and StanChart.  


  • Santander yesterday priced a $3.5bn 2-part ($1.5bn 5y and $2bn sub 10y). Leads are BofA, Citi, GS, HSBC, JPM, Jefferies, MS, RBC, Santander, TD and WFS. A2/A+/A on 5y and Baa2/BBB+/BBB on 10y. +140bps and +295bps respectively.