USD Swaps: 2y and 5y auctions digested smoothly

Calm waters
The auction double header of 2y and 5y proceeded smoothly, with the 2y going through by 0.6bps and the 5y coming at bid side. BNPP buys the dip.

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  • 2y and 5y auctions digested smoothly

  • Buy the dip in 5y maturity – BNP Paribas  

  • New issues


    2y and 5y auctions digested smoothly

    Treasuries have harbored a modest bull steepening move, with the front end and belly around 3bps lower on the day, while the very long end has lagged, rising around 0.5bp in the back end. The 10y note yield is last 4.204% or 2.7bps lower while 2s10s is last 0.8bps steeper at -84.4bps and 5s30s 3bps steeper at -12.4bps. Equities ended the session higher (DJIA +0.62%, S&P +0.6% and Nasdaq +0.84%).


    The compressed auction cycle going into month end Thursday was the main focal point for USTs today. First up, the $45bn 2y came 0.6bps through the 11:30am bid side, drawing a rate of 5.024%. Indirects dropped a smidge (65%) while directs also fell (20%), leaving primary dealers with a higher 15% allocation versus the prior month. The bid-to-cover of 2.94x was higher.


    Later, the $46bn 5y came at the 1pm bid side, drawing a rate of 4.40%. Indirects rose (62.9%) while directs dropped (18.3%), and primary dealers saw a higher 13.83% allocation. The bid-to-cover of 2.54x was lower.


    Swap spreads saw modest rangebound price action today amid decent volumes. Elsewhere, IG new issuance is likely shuttered until next Tuesday, when the post-Labor Day rush fires off.


    2s -12.375bps (+0.5bps), 3s -16.5bps (unch), 5s -22.75bps (-0.25bps), 7s -29.875bps (+0.25bps), 10s -26.875bps (+0.25bps), 20s -62.875bps (+0.125bps), 30s -65.625bps (+0.25bps).



    Buy the dip in 5y maturity – BNP Paribas  

    Analysts at BNP Paribas find that yields are “in a more balanced valuation” now after previously calling at the end of June “for higher intermediate and longer-term yields, arguing that a range of considerations supported a cautious approach to owning duration and limited the upside to longs even in an economic slowdown.”


    Since then, BNP Paribas’ preferred rate proxy (5y5y UST) “has risen as much as 70bp while the 10y ACM term premium has also risen by 70bp” with the selloff supported in part by “UST supply/demand considerations and the global yield environment – amid ongoing signs of economic resilience” - factors it had seen as supporting its case for higher yields back at the end of June.


    With this backdrop, BNP Paribas now views further selloffs “as an opportunity to establish long exposure.”  However, “as some of the factors underpinning the term premium reset are likely to persist, material rallies are more likely to come from the expectations channel,” the bank suggests, Therefore, BNP Paribas believes this keeps “longer term yields sticky, supporting our preference to express any long bias in more Fed-sensitive maturities (e.g. 5y or shorter).”


    The bank sees shorting payers to higher strikes as “one way to implement the expression, allowing investors to take in some premium in a period where economic data may not yet justify a more pronounced shift in yield trajectory” and it finds that the 5y point “offers a good mix of (modestly) positive payer skew while meeting our maturity preference.”


    In this vein, the bank favors trades such as selling 3m5y A+30bp payer or buying a 3m5y A+10bp/A+30bp 1x2 payer spread.



    New issues

    For a complete review of issuance over the past week, please see USD New Issues.