USD Swaps: Curve steeper; Calm approach to CPI

Deflated red balloon 21 Jun 2021
CPI looms but casual observers of fixed income markets would assume it is yesterday's news. USTs are outperforming but moves, so far, are cautious.

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  • Curve steeper as market bides time

  • CPI talk… so calm

  • New issues:


Curve steeper as market bides time

The approach of the monthly US inflation print (for July, see more in the next section) has ensured relatively tight trading ranges in USTs as final jostling takes place, though curve-steepening is a definite trend across core bond markets.  


In the Bund market, that steepening is restricted to a 0.2bps move in 2s10s, which is reversed in 10s30s. Gilts though are currently 2.5bps steeper in 2s30s and most notably, USTs are +2.3bps in 10s30s. Even more pertinently perhaps while other 2-year sectors are 2-3bps higher in yield, the 2y UST is -1.3bps at 4.795%, outperforming all-comers.


This clearly suggests that the UST market expects an on-target or even lower print from CPI today but, like everybody else, it doesn’t actually have a clue and in Summer trading conditions (which across core fixed income markets saw Tuesday’s volumes come in lower than they did on Monday), small surprises can have large outcomes. 


Curve steepening is the rational approach for a market eyeing a reassuring inflation print, even if not actually a drop in CPI. But while the gilt market is obligingly steepening in line with USTs, Bunds and other EU sovereign bonds markets, are trading 3bps or so higher in yield across their curves after not much at all in terms of obvious drivers.


In SOFR swap spreads, there is a mild steepening trend but its vigour can be summed up by moves of 0.0bps in 20y and 30y ASWs. There is a bit more life in the shorter maturities with 2y ASWs -1bp at -11bps, 5y is -0.25bps at -21.375bps and the 10y is +0.5bps at -28.125bps. But, of course, if there is any fun to be had today, it will most come after that still-important CPI data.



CPI talk… so calm

After all the excitement last month about the drop in June US CPI to 3.0% versus 3.1% forecast and 4.0% in May, the arrival of today’s July CPI is anticipated with less excitement. Essentially the US CPI dragon is perceived as already slain, while August trading conditions are not naturally conducive to creating a buzz.


Any upside shock though will be exactly that. Any downside surprise will deepen the feeling that a bull market for bonds is just around the corner. The average forecast, as generated by Bloomberg is for a pop up to 3.3% annually in July and for a 0.2% monthly print (headline and core), unchanged from June, though annualized core is expected to dip from 4.8% to 4.6%.


Explaining that, strategists at BNPP said today that “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.”


While this all sounds very sensible and contained, today’s CPI number is still far and away the best chance the market has to go crazy this week, at least at the hands of scheduled new headlines.


New issues:


  • Transdigm Inc, the catchily-named Ohio-based aerospace/defence company, last night priced a $1.45bn, 7y NC3 6.875% bond at par via Barclays, Citi, Capone, Goldman, HSBC, JPM, KKR, MS, PNC, RBC and WFS. USTs +190bps.