USD Swaps: Month-end enters conversation; Added significance to NFP data

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Month-end enters conversation; Added significance to NFP data

Treasury yields managed to nudge a little lower and - while off the earlier troughs - stay there this session as “the month-end extension entered the conversation and activity more prominently,” according to one dealer.  And with the final month-end extension of the summer entering its final hour, the benchmark 10y note yield is seen in the screens 1.6bps lower at 4.098% while the 2s10s spread is 1.2bps wider at -75.25bps.

Meanwhile, red SOFDR futures are posting 2.5 to 3 tick gains into the close while SOFR swap spreads have compressed across the board today amid below-average activity overall, if best seen at the 5y and 10y tenors.  In the backdrop, Quebec closed out IG issuance for the month August with a $1.5bn 120y global with risky assets largely treading water this session (Dow -0.48%, S&P -0.16%, Nasdaq +0.11%).

Ahead, for the month of September, surveys forecast around $120bn in IG issuance for the month. Compared to 2022, the expected volume is lower than last year’s forecast of $145bn for September - which ultimately proved to be way above the actual $78.6bn seen that month. Still, the day after Labor Day in 2022 saw the largest day of the year for 2022 with a whopping $35bn. Sources expect that this year will see the same seasonal front loading for the first days in September post-Labor Day - though perhaps not in all one day. 

Separately, with the most recent batch of softer-than-expected data (i.e. JOLTS, consumer confidence, ADP, GDP) helping to push Treasury yields lower, strategists at SocGen have put even more added significance on tomorrow’s non-farm payrolls print (+170k Bloomberg consensus) to either confirm the downward trajectory in rates or stop/reverse it in its tracks.  SocGen explains:

”…The ‘stone that started the avalanche’ is one way to characterise this week’s run of negative data surprises in the US and subsequent profit taking in the dollar and rally in bonds. However, we think this is over-reaching and ignores the danger of a head fake if payrolls do not disappoint tomorrow.

 

“…Tactically, it is tempting to conclude that an inflection point has been achieved after the return of EUR/USD above 1.09 and the decline in 2y UST yields to 4.85%. The month of August has been lucrative for USD/G10 and USD/EM but gains have faltered in the final stretch. Once the curtain falls later today, we should have a better idea of the degree to which price action since Tuesday was exaggerated by month-end portfolio rebalancing.

 

“…Disappointing data and the decline in the Citi surprise index to a 2-month low has visibly enticed investors to trim dollar profits and prompted a flurry of market calls that US 2y yields have peaked and 10y Treasuries are a (screaming) buy.

 

“…The importance of the NFP data cannot be underestimated in the context of the Fed’s desire to achieve looser labour market conditions (higher unemployment) without triggering a recession. Job gains of around 200k, close to the three-month trend, validate the ‘high for longer’ policy mantra. Where it gets interesting for the markets is a ‘1-handle’ (bullish bonds, bearish dollar). A number closer to, or north of, 250k would signal an undesirable re-acceleration of employment and wrong-foot investors after the weaker JOLTS, consumer confidence and 0.3ppt downward revision of 2Q GDP growth to 2.1%.”

SOFR swaps – 2s -9.75bps (-0.375bps), 3s -17.625bps (-1.25bps), 5s -22.125bps (-0.75bps), 7s -30.75bps (-1bps), 10s -28.125bps (-0.75bps), 20s -64.625bps (-0.75bps), 30s -67.25bps (-0.625bps).

New issues

• LG Energy plans USD 3y and/or 5y Green bonds after meeting investors from Aug 30. Leads are BofA, Citi, MS, StanChart and KDB.

   

• Quebec priced a $1.5bn 10y Global at swaps +72bps. Leads are BofA, BMO (B&D), HSBC, NBC and TorDom.