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USTs bull-steepen post CPI; 30y bond auction preview
The much-anticipated August CPI report was roughly in line with expectations with headline inflation rising by a consensus +0.6% MoM resulting in a five-tenth increase in the YoY rate to 3.7%. Meanwhile, core inflation rose by +0.3% MoM which was one-tenth above consensus while the YoY rate fell four-tenths to a consensus +4.3%, the lowest reading since September 2021. Lastly, the all-important NSA came in at 307.026, a touch higher than 306.976 consensus.
As for the implications of today’s inflation data for the Fed, strategists at BofA posit the following:
- ”… We retain our call for a 25bp hike in November. Core CPI was stronger than we expected, and activity has been robust to start 3Q. Given this backdrop, we think the Fed will continue to err on the side of doing too much rather than too little and follow through with one more 25bp hike.”
Meanwhile, strategists at BNP Paribas suggest that:
- ”…We do not think the report changes the calculus for the September FOMC meeting. As for November and beyond, officials are unlikely to want to close the door to more tightening if the data warrants it. That said, though we expect the Fed to signal a state of readiness to hike again, we believe activity and price data will evolve in a way that lets the central bank focus on the length of policy restriction at current levels, not further hikes.”
Post-data, Treasuries have come off their earlier lows with yields currently mixed (~ +/- 2bps) as the curve bends steeper. The benchmark 2y note yield is last 2.1bps lower at 4.999% while the 2s10s spread is 2.3bps wider at -72.1bps. Meanwhile, short-dated TIPS breakevens are roughly 2-4bps higher after the modestly above market pricing of the NSA.
In swaps, SOFR spreads are narrowly mixed with the spread curve flattening against the steepening in underlying rates amid above-average swap volumes. In the backdrop, IG issuance has tailed off from its breakneck pace despite today’s buoyant risk tone (Dow +0.23%, S&P +0.31%, Nasdaq +0.53%).
Ahead, Treasury will round out this week’s supply cycle with today’s $20bn reopened 30-year bond auction, $2bn larger in size from the last reopening auction in July, after yesterday’s $35bn 10y note re-opening went off without a hitch. Heading into today’s auction, strategists at JP Morgan expect to see similar decent results today and they highlight the following:
- ”… The August auction stopped 1.5bp cheap to pre-auction levels as end-user demand once more ticked down slightly to 87.5%, the lowest since February 2023. Within the details, foreign takedown increased 6.0%-pts to 14.9% as investment manager demand declined 9.2%-pts to 68.5%, also the lowest since February, 2023.
“…Since the last auction, 30-year yields have risen 16bp and are only 11bp off their cycle highs. Meanwhile the 10s/30s curve has flattened by 6bp since the last auction but looks fairly priced when controlling for near-term policy expectations, medium-term inflation expectations, and the Fed’s share of the Treasury market.
“…We are aware that (today’s) CPI release will likely dictate the near-term direction of markets pre-auction and, if the release comes in line with our expectations, the further cooling in core inflation should provide room for yields to decline further as the narrative around a Fed on hold in September is cemented. Thus with the 30-year sector yields near their cycle highs, we think the auction should be well digested if tomorrow’s CPI release confirms further easing in inflation.”
SOFR swaps - 2s -9.75bps (+0.75bps), 3s -13.5bps (+0.625bps), 5s -21.625bps (+0.125bps), 7s -30.375bps (+0.125bps), 10s -29.5bps (-0.125bps), 20s -64.125bps (unch), 30s -67.5bps (unch).
Formosas and ZC callables
- SocGen sold a $30m 15y NC7 zero coupon callable (non-Formosa). The EMTN matures Sep 2038 and is callable annually starting Sep 2030. Self-led. Estimated IRR 6.13%. Announced Sep 13.
- Asian Development Bank sold a $30m 20y NC6 zero coupon callable (non-Formosa). The EMTN matures Sep 2043 and is callable annually starting Sep 2029. Lead MS. Estimated IRR 5.63%. Announced Sep 13.
- HSBC sold a $50m 20y NC7 zero coupon callable (non-Formosa). The EMTN matures Sep 2043 and is callable once on Sep 2030. Self-led. Estimated IRR 5.75%. Announced Sep 11.
- Sierra Pacific Power Co. is working on a $400m 30y deal via BofA, JPM, MIX, RBC and TSI. A2/A+. Price talk: +190bps area.
- CenterPoint Energy Houston Electric is working on a $500m 5y deal via MUFG, PNC, RBC, Scotia and TD. A2/A/A. Price talk: +110bps area.
- Marriot International is working on a 3y and 5y benchmark via BofA, GS, PNC and USB. Baa2/BBB. Price talk: +130bps area, +155bps area.
- FWD Group (Baa2/BBB) is preparing a USD 10y through HSBC, JPM, MS, Mizuho and StanChart
- Korea Southern Power (Aa2/AA-) is preparing a USD 3y via Citi, Mizuho and Nomura after meeting investors on Sep 12.