USD Swaps: Breakout threats assessed; Bear steepening redux

Breakout threats assessed; Bear steepening redux

Treasury yields are again probing the upper end of the range in a bear steepening move reminiscent of last Thursday – to a lesser degree - as BOJ YCC potential impacts are seen as weighing the long end, sources suggest. Indeed, the back end is up as much as 8.5bps in yield with the 10y note yield last 4.045% or 7.8bps higher on the day while 2s10s is up 6.3bps to -85.6bps and is testing the highs seen in July.

In data, JOLTS job opening dropped to the lowest since April 2022 while ISM Manufacturing and prices paid were both lower than expected (46.4 vs. 46.9 forecast, 42.6 vs. 44 forecast).  Equities are mostly down (DJIA +0.10%, S&P -0.33% and Nasdaq -0.38%).

“It is good to see the curve steepening and the approach of the highs in yields in 10s again,” remarked one source, who felt, however, that “a double top” could be very well be forming, and that a further breakout would require some additional momentum as “4% yields do look enticing" - but at the same time the outlook of higher deficits and the threat of overseas selling is adding pressure to the back end in a way that hasn't been seen for a long time, he added.  

Swap spreads are mildly tighter to start with the front end and belly spreads tracking in, though are now off the lows of the day amid lower than average volumes. The IG new issuance calendar has not followed up on the burst of activity seen yesterday as only one issuer is in the works today (Booz Allen Hamilton) after yesterday’s $19.5bn ten-issuer haul.  

Examining yesterday’s SLOOS (Senior Loan Officer Opinion Survey), analysts at BNP Paribas believe the survey “supports the notion that past policy tightening is still percolating through the US economy” and thus BNP Paribas argues “additional policy rate increases are unlikely.”

BNP Paribas finds that the data indicated that banks:

“Tightened standards at an elevated intensity roughly similar to the past year, across loan categories: commercial and industrial, consumer and real estate” and that “weakening demand for credit and bankers’ concerns about the outlook imply a broader slowing in economic activity in response to previous policy tightening – not simply a supply-led response to banking sector developments at the end of Q1 2023."

 

Moreover “tighter standards for C&I loans are consistent with GDP growth slowing to recession territory in coming quarters.”

2s -8.375bps (-0.25bps), 3s -14.25bps (-0.125bps), 5s -20.875bps (-0.25bps), 7s -27.75bps (-0.25bps), 10s -26.5bps (-0.125bps), 20s -62.875bps (-0.5bps), 30s -65.125bps (+0.125bps).

New Issues

• Booz Allen Hamilton plans a $TBA 10y. Leads BofA and JPM. Baa3/BBB-. Price talk +240bps area.