USD Swaps: Modest bull flattening into 10y; IG supply slows

Dollar USD bills 14 Jun 2022
The $38bn 10y auction is up and sources look to see how the larger size is taken down. Swap spreads are modestly higher. JP Morgan previews the 10y.

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  • Modest bull flattening into 10y; IG supply slows

  • New issues


    Modest bull flattening into 10y; IG supply slows

    Treasuries are seeing a small bull flattening into the 10y auction, with the 10y note yield last 4.006% or 2.2bps lower while 5s30s is 2.6bps flatter at 7bps. With CPI tomorrow, sources say that the market is positioning squaring before the event and looking toward the 10y auction for indications on broader duration appetite. Equities have opened slightly weaker (DJIA -0.09%, S&P -0.26% and Nasdaq -0.91%) while energy is up (WTI +1.2%, Brent 1% and NYH gasoline 1.3%).


    Swap spreads are trending wider, with the belly of the curve leading the modest move amid lower than average volumes. On the issuance side, McDonald’s 3-part is the main new issuance for the day. As for the 10y auction, analysts at JP Morgan preview:


      At $38bn, the auction is “$3bn larger in size from the previous newly issued auction in May. The July 10-year auction cleared at 3.857%, 0.9bp cheap to pre-auction levels as end-user demand rose to 87.6%, the highest since February 2023. More granularly, the share allotted to foreign investors declined by a further 3.1%-pts to 7.6%, the lowest share since January 2009, while investment manager demand rose 8.4%-pts to 77.1%, the highest on record.”


      “Since the last auction 10-year yields have risen by 17bp, but are approximately 15bp off their highest levels from last week. Given current levels, the 10-Treasuries appear fair to slightly rich after controlling for the market’s near-term Fed policy expectations, as well as medium-term growth and inflation expectations. Furthermore, along the curve the 10-year sector appears rich on the fly after adjusting for the level of rates and slope of the curve. The WI roll opened at -1.5bp, in line with our expectations, and have since cheapened to -1.0bp, more than implied by the erosion of carry.”


      “Treasury’s refunding announcement last week indicates it will lean more heavily on 5- and 10-year notes when increasing auction sizes, and these tenors are ultimately likely to rise above their 2021 peak auction sizes. Additionally, risk appetite may be depressed given that the July CPI report is set to be released on Thursday morning; our work has shown that over the last 5 years, 10-year auctions tend to tail by 0.5bp when held on the day prior to CPI, significantly higher than on other days.


      “With risk appetite likely to remain weak ahead of CPI and yields off their local highs from last week, we think…(the) auction will need a concession in order to be digested smoothly.”


    2s -9.5bps (unch), 3s -13.375bps (+0.875bps)*, 5s -21bps (+0.375bps), 7s -29.125bps (+0.375bps), 10s -29.125bps (+0.25bps), 20s -64.75bps (+0.625bps), 30s -69.125bps (unch).


    *adjusted for the 2.1bps give



    New issues


    • McDonald’s is working on a $TBA 3-part (5y, 10y and 30y). Leads on 5y ACADSE, Citi, LOOPCM, SAMRCO, RSEEL, SIEWIL. Leads on 10y and 30y Citi, GS, TSI, WFC. Baa1/BBB+. Price talk +90/95bps, +120/125bps, and +150/155bps area.  


    • Toyota Motor Credit is working on a $TBA D&I 3y. Leads ACADSE, CASOAK, DRXHAM, HSBC, RAM, RSEEL. A1/A+/A+. Price talk +75bps area.