USD Swaps: Yields edge up but outperform

• Yields edge up but outperform

• Barclays: Don’t over-price the peak

USD Swaps: Yields edge up but outperform

A raft of second-tier US economic data sailed onto the screens of traders in New York this morning, with the only to be significantly off-forecast being the often-flaky Empire Manufacturing (+1.9 versus -10.0 forecast and previous -19.0!).

Admittedly, added all-together the export/import price indices rose a little more than forecast. This first wave of data was followed 45 minutes later by manufacturing production, capacity utilization (both pretty much on forecast) and industrial production data that came in a touch stronger than forecast (+0.4% versus +0.1%).

One UST trader said prior to the data bursts that trading conditions across USTs, EGBs and gilts were all much more like a Summer Friday than an Autumn Friday and that if EGB’s were experiencing profit-taking after yesterday’s dovish hike rally, both UST and gilt markets were “seeing sloppy longs being squeezed” in surprisingly thin volumes.

While gilts have led the rally of the last two weeks on talk of an imminent MPC hiking peak, the trader said “the data has been pretty weak in the UK, but in the US it is stronger, so of the ‘big three’ the Fed probably is the hardest one to read. So we could see USTs becoming the more volatile market in the weeks to come.”  

Shortly after the 2:15pm EST data releases, the 10y UST yield was well within its intraday range of 4.33-4.27% at 4.31%, +2.5bps on the day, outperforming gilts and Bunds easily in the process. 2s10s was +0.7bps and 10s30s was -1bp. In ASWs the whole curve was around 0.25bps more negative.

Barclays: Don’t over-price the peak

Strategists at Barclays warned this week that there might be a little too much dovish optimism swishing around the UST market at the moment, and recommended continued shorts in the front end of the UST curve.

Barclays said that: “All in all, Western central banks are widely perceived to be at or nearing the end of the hiking cycle. Risk assets have largely welcomed the news… (but) investors have been closely watching the August retail sales print for signs of a payback from the strong July print. While the m/m change for control group did slow to 0.1% from 0.7%, the fact that spending rose further (instead of reversing) after a sharp increase in July suggests the boost was not entirely driven by one-offs. More real-time data on card payment show a rebound in September so far from August.”

In addition, Barclays said that “we believe while the labor market is easing, it is still supporting strong income growth, which has been the source of US resilience. The payroll proxy (product of employment, hours and earnings) has risen by about 7% in nominal terms over the past three months and 6% over the past 12 months. In real terms, it has risen by 2.8% over the past year.”

“Coupled with strong household balance sheets (with a high net worth/income ratio), which are keeping the saving rate low, spending is keeping pace with income growth.”

“All of this,” it deduces, “puts widely held expectations of an upcoming slowdown at risk it pushes energy inflation higher, concerns about pass-through into food and core inflation (given the impact on transportation costs) are likely to become more prominent. We would be closely watching consumer inflation expectations, which are still well above pre-COVID levels and are likely to rise from here, which, in our view, would be concerning for the Fed.”

In conclusion Barclays continues to recommend “shorting 2y US Treasuries (entry: 4.82% using July 25s, current 5.05%, carry adjusted p/l of +27bp). We maintain that view. While markets have reassessed the path of the policy rate higher, we believe they are still not appropriately priced (while)… Further out the curve, we have been arguing that it is not yet time to be long duration

despite the sharp move higher in long-term yields. We maintain that view.”

New issues:  

• The African Development Bank has mandated BNPP and Goldman as joint global coordinators ahead of planned USD bond issue. Investor calls are scheduled for today.

   

• EDO Sukuk yesterday priced a $1bn, 5.875%, 2033 bond at USTs +185bps via global coordinators JPM and Standard Chartered and a host of lead managers.

   

• Bangkok Bank yesterday priced a $750m, 5.5%, 10y bond at USTs +128bps via Citi, HSBC, JPM and MS.