USD Swaps: Bull flattening reversal; 3y auction strong; CPI ahead

Swerve curve 13 Jun 2022
USTs ended up with a solid bull flattening reversal as the 10y led the move. The 3y auction was strong despite the set up. BNPP looks at CPI ahead.

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  • Bull flattening reversal; 3y auction strong; CPI ahead

  • New issues


    Bull flattening reversal; 3y auction strong; CPI ahead

    Treasuries yields are ending the session 2 to 7.3bps lower on the day, with the bull flattening led by the 10y. The 10y is last 4.024% while 2s10s is last 5.6bps flatter at -73.5bps and 5s30s -1bps lower at 9.5bps. Equities ended lower, but well off the intraday lows (DJIA -0.45%, S&P -0.43% and Nasdaq -0.79%).


    Earlier, the $42bn 3y auction was surprisingly strong, coming through the 1pm bid side by 2.2bps and drawing a rate of 4.398%. Indirects climbed to a record high 74% and while directs dropped to 15.7%, and primary dealers saw a new record low allocation of 10.3%. The bid-to-cover of 2.9x was strong. Tomorrow sees the $38bn 10y and sources judge the 10y and 30y as a truer tests of demand for duration amid the higher sizes. 


    Swap spreads saw little alteration today amid mixed volumes best seen in the front end and the back end of the curve while the belly saw lower than average flows.


    IG new issuance (ex-SSA)  priced $9.75bn across eight issuers that were undeterred by the risk-off vibes. The largest issuance came from BMW US Capital (a $3bn 4-part) followed by a $2.7bn 3-part from CononoPhillips - both were likely not swapped. Week to date now stands at $24.25bn –  a robust two-day haul versus the expected $30bn forecast for the week.


    Looking ahead to CPI later this week, analysts at BNP Paribas expect both headline and core CPI “to print at 0.2% m/m in July, unchanged from the prior month” while base effects “should  lift the y/y headline rate to 3.1% from 3.0%, while core should decline to 4.6% y/y from 4.8%.”


      “An anticipated contraction in goods prices, led by used vehicles, should knock just under 0.1pp off the m/m core reading.  Declines in used vehicle prices look likely to extend through the next few months, but relatively tight inventories stand in  the way of a full return to pre-pandemic price levels.”


      “Gasoline prices jumped at the end of the month – likely too late to impact July CPI, but could add 35bp to m/m headline  CPI in August if maintained at current levels. Pass-through to core inflation is likely to be limited at least initially, but long term inflation expectations – which remain near the top of their range – could be vulnerable.”


      “The July CPI report is the second-to-last before the September FOMC meeting. Though we expect the August headline  reading to climb due to higher gasoline prices, the milder trend in core will allow the Fed to hold rates steady, in our view.”


    Further, BNP Paribas views that inflation expectations are “the greater near-term risk” and while shorter-term expectations have declined, “longer-term ones have proved more resilient.” For example,  University of Michigan 5-10-year inflation expectations “have remained near the top of their recent range, despite the prior moderation in both gasoline prices and realized inflation,” it highlights.


    The bank cites recent comments by Fed’s Waller, who leans on the hawkish side, who said “I am going to need to see this improvement sustained before I am confident that inflation has decelerated.”


      Waller “further specified that “two more good CPI prints” could be enough for him to stop supporting hikes. Though we see scope for an acceleration in headline CPI in August given the jump in gasoline prices, we think core should  rise at a pace similar to June and our expectations for July.


      “With more dovish-leaning Fed officials (such as Atlanta Fed  President Bostic) already publicly voicing preference for a September pause, the trend we anticipate in core inflation should  bring more hawkish leaning officials into the fold as well, translating to a unanimous decision to hold rates steady at the  September FOMC meeting.”


    For more views the CPI forecast, please see USDi.


    2s -9.5bps (-0.875bps), 3s -16.25bps (+0.5bps), 5s -21.5bps (+0.25bps), 7s -29.25bps (unch), 10s -29.5bps (+0.125bps), 20s -65.375bps (-0.375bps), 30s -69.125bps (-0.25bps).



    New issues


    • ConocoPhillips priced a $2.7bn 3-part ($1bn 10y, $1bn 30y and $700m 40y). Leads MUFG, TD, BofA and Mizuho. A2/A-/A. +105bps, +135bps and +150bps.


    • BMW US Capital priced a $3bn 4-part ($800m 2y, $600m 2y FRN, $1bn 5y and $600m 10y). Leads DB, BofA, GS, TD and WFS. A2/A.  +55bps, SOFR +62bps, +95bps, +115bps.


    • Antares Holdings priced an upsized $400m 5y. Leads SMBC, Citi and DB. Baa2/BBB-.  +387.5bps. Upsized from $300m.


    • Entergy Texas priced a $350m 30y FMB. Leads BofA, BNPP, GS, RF and Scotia. A3/A. +160bps.


    • CenterPoint Energy priced an upsized $400m 3y. Leads Barclays, Citi and MS. Baa2/BBB/BBB. +90bps. Upsized from $300m.


    • NNN REIT Inc. priced an upsized $500m 10y fixed. Leads BofA, Citi, MS, USB and WFC. Baa1/BBB+. +187.5bps. Upsized from $400m.


    • Ingersoll Rand Inc. priced a $1.5bn 2-part ($500m 5y and $1bn 10y). Leads Citi, GS and JPM. Baa3/BBB-/BBB-. +137bps and +177bps.


    • Virginia Electric & Power priced a $1bn 2-part ($400m 10y and $600m 30y). Leads BMO, CIBC, REGFIN, Scotia, SMBC and TFC. A2/BBB+/A. +128bps and +150bps.  


    • Oaktree Specialty priced a $300m long 5y. Leads BofA, JPM, RBCCM and SMBC. Baa3/BBB-.  +325bps.