USD Swaps: Risk off vibes; 4% test; IG supply and 3y

Risk off vibes; 4% test; IG supply and 3y 

Risk off back in the air after Moody’s downgraded several smaller regional banks and announced that other downgrades might be in the works for larger banks including State Street, Truist, BoNY Mellon and US Bancorp. The 10y note yield went through 4% briefly earlier and is last 4.006% or 9bps lower while 2s10s is last -8.2bps flatter at -76.2bps while 5s30s is 2.7bps lower at 7.7bps. Equities are lower across the board (DJIA -1.16%, S&P -0.97% and Nasdaq -1.52%). As for TIPS, BEs have been caught up in the risk off wave and are down around 4bps across the board, giving back yesterday’s gains of around the same magnitude and then some.

Meanwhile, swap spreads thus far are seeing modest 0.25bps gains/losses outside of the 2y, which is around 1bp lower on the day amid higher than average volumes to start. On the IG issuance side, after a slow start, supply is heating back up with multi-tranches from BMW US Capital (4-part 2y, 2y FRN, 5y and 10y) and ConocoPhillips (3-part 10y, 30y and 40y) along with a bevy of smaller issuers (see below). In UST supply, the $42bn 3y is up and not seeing much of a needed concession some feel it needs (see link).   

Elsewhere, in its revised outlook, analysts at BofA now see a milder downturn/growth recession.  At this point, BofA retains its UST front end underweight recommendation and “stills like fading rate cuts in early '24” while the bank’s back-end rate bias “is more neutral" and it still recommends "trading the back end tactically from the long side" but sees "the trading range has likely shifted to 3.75-4.25%.” BofA continues to recommend clients “hold 5-10y spread tighteners due to the UST supply/demand imbalance.”

After the refunding announcement, BofA forecasts further auction size increases through April 2024 “but at a gradually slower pace” while it suggests “risks skew to higher sizes.” Further, BofA reckons that coupon offerings will “test post COVID highs” as it anticipates that “net coupon supply to the public will exceed post pandemic highs in FY 25" and “a longer QT trajectory would result in even larger figures.” As a result, BofA judges that “elevated coupon supply poses greater risk to Treasury market functioning, and cheapening vs OIS especially if the economy remains resilient and demand weak.”

 

Meanwhile, the bank suggests that “wavering confidence in the long duration view from asset managers and outflows from bond funds is a risk. While benchmark funds are overweight US duration and inflows into UST funds are strong, reduced recession fears may support a reversal. In an environment where banks and foreign investors are likely sidelined, this threatens UST demand.”

 

On YCC, BofA finds that “BoJ adjustment poses upside risks to UST yield and steeper curve path” as “limited Japanese demand adds to our underlying concerns about a supply demand imbalance that could pressure swap spreads tighter over time.” Further, “lower Japanese UST demand has likely reduced some pressure off XCCY basis and USD funding need, which may be a marginal offset to tighter conditions into year end,” the bank adds.

2s -9.875bps (-1.25bps), 3s -17.125bps (-0.25bps), 5s -21.5bps (+0.25bps), 7s -29.25bps (unch), 10s -29.5bps (+0.25bps), 20s -65.25bps (-0.25bps), 30s -69bps (-0.125bps).

New issues

• BMW US Capital is working on a $TBA 4-part (2y, 2y FRN, 5y and 10y). Leads DB, BofA, GS, TD and WFS. A2/A. Price talk +75bps, SOFR equivalent, +115/120bps, +135/140bps.

   

• ConocoPhillips is working on a $TBA 3-part (10y, 30y and 40y). Leads MUFG, TD, BofA and Mizuho. A2/A-/A. Price talk +130bps, +160bps and +175bps area.

   

• Antares Holdings plans a $300m 5y. Leads SMBC, Citi and DB. Baa2/BBB-. Price talk +412.5bps.

   

• Entergy Texas plans a $350m (no grow) 30y FMB. Leads BofA, BNPP, GS, RF and Scotia. A3/A. Price talk +190bps area.

   

• CenterPoint Energy is working on a $300m 3y. Leads Barclays, Citi and MS. Baa2/BBB/BBB. Price talk  +120bps area.

   

• NNN REIT Inc. plans a $400m 10y fixed. Leads BofA, Citi, MS, USB and WFC. Baa1/BBB+. Price talk +215bps area.

   

• Ingersoll Rand Inc. is working on a $TBA 2-part (5y and 10y). Leads Citi, GS and JPM. Baa3/BBB-/BBB-. Price talk +180bps and +215bps area.

   

• Oaktree Specialty plans a $300m long 5y. Leads BofA, JPM, RBCCM and SMBC. Baa3/BBB-. Price talk +335bps area.  

   

• Virginia Electric & Power is working on a $TBA 2-part (10y and 30y). Leads BMO, CIBC, REGFIN, Scotia, SMBC and TFC. A2/BBB+/A, Price talk +150bps and +175bps area.