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USTs chop; Financial conditions negative feedback loop
Today’s data has seen Philly Fed dip down to -13.1 from a prior +1.4, existing home sales come in at a weaker-than-expected -2.2% (versus -0.2% consensus), Richmond Fed manufacturing come in at a better-than-expected -7 (versus -10 consensus) and Richmond Fed business conditions rise up to 1 from a prior -8.
Amid the cross-currents of mixed data, it’s been a choppy trade in Treasuries that initially saw overnight gain fade but now seeing USTs clawing back as equities fall off their opening highs (Dow -0.28%, S&P -0.07%, Nasdaq +0.54%). The benchmark 10y note yield is last 0.6bps lower at 4.332% after carving out a range of roughly 4.30%-4.36% since the early trade. On the curve, the front-end is underperforming, leaving the 2s10s spread 3.6bps narrower at -70.3bps while the 5s30s spread is 4bps narrower at -6bps.
Meanwhile, SOFR futures are 3 to 5 ticks softer in the reds while SOFR swap spreads are narrower across the board amid below-average activity as the spread steepens against the flattening in underlying rates. In the backdrop, today’s IG new issue docket is littered with potential SSA swap candidates that include Kommunalbanken Norway, DBJ and EIB.
Elsewhere, today strategists at BofA were stopped out of their 10y duration long recommendation initiated on July 10th. Their logic at the time included (1) near-term inflation likely to moderate; (2) yields cheap to fair values; (3) slowdown vs acceleration odds split; (4) positioning shows low conviction in selloff. Looking ahead, BofA believes that rates will continue higher until the negative feedback loop from financial conditions stops and it expounds on this view below:
- ”… The path of least resistance in the US rates market is likely higher yields until there is a clear signal of negative feedback from the real economy or financial conditions. Higher rates are the path of least resistance due to: strong growth, daunting supply/demand balance, and offsides real money positioning. The rate selloff will only stop when there is (1) clear evidence the economy is slowing (2) negative feedback via financial condition tightening. There is not clear evidence of either, yet.
“…We expect the clearest stop to the rate rise will come from financial conditions. Financial conditions are forward looking while economic data is backward looking. Financial conditions should more meaningfully tighten as there is clearer evidence of higher default risk, earnings revision downgrades, or overseas slowdown contagion.
“…There are early signs of some negative feedback from financial conditions into the rates market. Since Jul 31 the SPX has declined nearly 5% while 10y rates rose 30bps. The rolling 30D correlation between 10y yields and equities is now nearly as negative as just prior to the SVB failure and regional bank stress. The market is clearly reflecting some signal that the recent interest rate rise is starting to bite. When higher real rates begin to weigh on the growth outlook, we would expect to see more of the conventional bull steepening observed when the curve is inverted.”
SOFR swaps -2s -12.5bps (-1.25bps), 3s -16.125bps (-1.125bps), 5s -21.125bps (-0.625bps), 7s -29.25bps (-0.375bps), 10s -26.625bps (-0.25bps), 20s -64.25bps (-0.5bps), 30s -67.25bps (-0.25bps).
Formosas & ZC callables
- JP Morgan sold a $30m 10y NC3 fixed callable Formosa. The EMTN matures Sep 2033 and is callable annually starting Sep 2026 and pays 5.97%. Leads JPM, KGI and Yuanta. Announced Aug 15.
- Charles Schwab is preparing USD 3y, 3y FRN and 11y NC10 bonds at around Treasuries +140bps, SOFR equivalent and +205bps. Leads are BofA, Citi, GS, JPM, MS and WFS.
- Kommunalbanken Norway plans a USD 5y at around swaps +46bps. Leads are BMO, Nomura, Scotia and TD.
- ADB is preparing a USD 5y Global via Barclays, BofA, Citi and JPM.
- DBJ launched a $600m 3y sustainability deal via Barclays, Citi, GS and MIZ. A1/A. Launched at MS +62bps.
- EIB priced a $4bn 5y Global at swaps +33bps. Leads are BMO, Citi (B&D) and RBC.