USDi: BE mixed but steepening intact as nominals ultimately fade

Chart red green numbers 13 Jun 2022
After another choppy trade in nominals that saw them ultimate fade in bear steepening fashion, BEs close mixed but steeper yet again.

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  • BE mixed but steepening intact as nominals ultimately fade

  • Barclays: Flying low; Recommend 2yfwd1y BE longs; Unwind 10s30s RY steepeners


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BE mixed but steepening intact as nominals ultimately fade

Another day of choppy trading in nominals that navigated through (1) better-than-expected housing starts data (+3.9% versus +1.1% consensus) which was somewhat tempered by weaker-than-expected building permits (+0.1% versus +1.5% consensus), (2) a better-than-expected print on industrial production (+1% versus +0.3% consensus), and (3) the July FOMC minutes (…in a nutshell, “significant” upside risk to inflation could require further tightening) is seeing nominal yields higher on the day (~2-5bps)  in a bear steepening move.


Against these crosscurrents, along with a relatively torpid risk backdrop (Dow -0.52%, S&P -0.77%, Nasdaq -1.15%) and another leg down in oil prices (Brent -1.91%, WTI -2.20%), the TIPS breakeven and inflation swap curves are ending mixed (~ +/- 2bps) but with the recent steepening trend intact.


“Real yields continued to follow their nominal cousins higher and higher, which today translated to significant underperformance for TIPS and a steepening of the breakeven curve,” one dealer explained.  “The intraday trading pattern has been very similar all week, with early strength quickly erased by larger selling flows and the breakeven rallies generally short-lived and sellers much easier to locate than buyers,” he continued.


Flow-wise in derivatives-space, swap trades on the SDR today included 1y ZC swaps at 240bps, 8y ZC swaps at 260.25bps, 9y ZC swaps at 258.75bps, 10y ZC swaps at 260.875bps, 259.25bps, 259.875bps, 261bps and 261.125bps, 20y ZC swaps at 256.75bps, and 30y ZC swaps at 254.875bps and 255bps (for all of today’s trades, see Total Derivatives SDR, which now also includes information on broker/platform).


Finally, on Thursday, the Treasury is set to announce the reopening of the TIIFeb53s, which Barclays expects to be for $8bn.


Heading into the final hour of trade, the 2y breakeven is going out at 195.75bps (-2.25bps), 5yu at 226.375bps (+0.5bps), 10y at 233.5bps (+0.875bps) and 30y at 233.625bps (+2.25bps).



Barclays: Flying low; Recommend 2yfwd1y BE longs; Unwind 10s30s RY steepeners

Airline fares again drove a weak July core CPI print, and strategists at Barclays think that the market will look through it and they continue to recommend 2yfwd1y breakeven longs.  In addition, Barclays unwinds its recommendation for 10s30s real curve steepeners ahead of the 30y TIPS auction next week.  The bank expounds on its views below:


    ”…The July CPI reading was somewhat weak, with core coming in at 0.16% for the second consecutive month. However, as with the June reading, the low print was largely caused by airline fares, which again was down 8% m/m. Outside of spring 2020, the 2m drop in airline fares of 15.5% is the largest in the history of the series. The series tends to be both volatile and mean-reverting, and while reports from airlines indicate the sector is going through a weak period, the -55% 3m SAAR likely overstates the underlying trend. Core services ex-airlines was relatively robust; at +0.44% m/m, it was the strongest reading on that series since February, and, therefore, citations of inflation’s demise may be a bit premature.


    “…We think the market should and largely will look through the airline fare-driven weakness, in part because breakevens are already priced for target-consistent inflation, so the bar is already set fairly low. Given this, we continue to find breakevens cheap across the curve and continue to recommend 2yfwd1y longs. The forward implied by the TIIApr25/TIIApr26 pair is at 2.22% and we are targeting 2.5%.


    “…We have also been recommending 10s30s steepeners. The steepening trend continued this week though it was more of the bullish variety, as opposed to last week’s decidedly bearish tone. The combined move has brought the spread from 11bp at initiation to 23bp, close to our target of 25bp, and we recommend unwinding the position. The reasons we laid out justifying a higher long-end real term premium stand, but we believe low breakevens and close to 2% 30y real yields may draw strong demand at the upcoming 30y auction, and therefore further near-term steepening may be limited.”