USD Swaps: Flatter; What next for the curve?

Chart 24 Nov 2021
USTs are bear-flattening a touch as global stocks recover. Banks look at the curve. Hedge funds gain. A couple of callables print.

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  • Flatter as stocks recover; HFs gain

  • SocGen: Bear-steepening unlikely to endure

  • Callables and Formosas: IBRD, ADB

  • New issues


Flatter as stocks recover; HFs gain

A MIB-led recovery in European risk assets following hasty tweaks to the new windfall tax on Italian banks has weighed on the Bund and supported a 0.2% pre-market gain in S&P futures. UST yields are a tad higher across the curve despite yesterday’s solid 3y sale (see Total Derivatives) with the 10y at 4.03% (+1bp) ahead of today’s $38bn auction and CPI on Thursday.    


In swaps, spreads are little-changed in below-par outright volumes at the longer end of the curve. Spreads are -9.50bps (unch) in 2y, -21.5bps (unch) in 5y, -29.5bps (unch) in 10y and -69.125bps (+0.125) in 30y.


Meanwhile a couple of big macro hedge funds had a decent run in July-August against the backdrop of a 12bps rise in 10y yields as the USD curve bear-steepened, a 1.1% fall in the dollar index and a 3% rise in the S&P500 last month.


First, Chris Rokos’s $14bn fund rose 3.7% in July to produce again for the year up to 2.7%, after the fund was much as 15% down for the year to March.


Second, Brevan Howard’s BH Macro feeder fund rose 0.91% in July followed by a 0.36% gain for the first week of August. Those gains cut the fund’s losses for -4.45% for the year to Aug 4, having been down as much as -6.13% in early July.


SocGen: Bear-steepening unlikely to endure

With 2s/10s USTs bear-flattening a touch to -74bps today, strategists at SocGen gauge the outlook for the curve as the Fed nears the end of its rate hike cycle


    ”The recent sell-off in bonds led by the long-end can be attributed to the rise in real yields and inflation expectations. Although the market is not fully pricing in an additional hike for this year, the rise in inflation expectations suggests the Fed might have more to do.


    “The 2s/10s curve has risen from a low of -105bp (on 24 July) to the current -70bp. What is unusual about this move is that the steepening has been primarily led by a selloff in the belly and long end of the curve.


    “(However) we believe a bear-steepening of the curve is not durable in the current environment…If the long-end continues to sell off, the rise in inflation expectations would ultimately lead to the market pricing in rate hikes, leading to a rise in front-end yields. Alternatively, if the data disappoints, with the front-end pegged to Fed expectations, a rally in Treasuries would result in the flattening of the curve.


    “Historically at the end of a rate hike cycle a sustained steepening of the curve tends to be a bull-steepener when the Fed is ready to pivot on policy. But with inflation high and sticky ‘higher for longer’ suggests the curve will be slow to disinvert.”


Callables and Formosas: IBRD, ADB

  • IBRD sold a $50m 20y NC5 fixed callable (non-Formosa). The EMTN matures Aug 2043, is callable annually from Aug 2028 and pays a 5.08% coupon. Lead is BNPP and announced Aug 9.


  • ADB sold a $50m 20y NC6 zero coupon callable (non-Formosa). The EMTN matures Aug 2043, is callable once in Aug 2029 and has an estimated IRR of 5.315%. Lead is JPM and announced Aug 9.


New issues

  • TransDigm plans a $1.45bn 7y NC3 secured bond (BA3/B+) via Barclays, CAPONE, Citi, GS, HSBC, JPM, KKR, MS, PNC, RBC and WFS.