USD Swaps: USTs hit by data again; 10yT yield to end the year at 3.75%

Bond chart 30 Jan 2023
Another batch of stronger-than-expected data has left USTs under pressure once again. SocGen sees 10yT yield to ending the year at 3.75%.

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  • USTs hit by data again; 10yT yield to end the year at 3.75%

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    USTs hit by data again; 10yT yield to end the year at 3.75%

    Despite a steady souring in the risk tone this session (Dow -0.72%, S&P -1.13%, Nasdaq -1.58%), Treasury yields have remained higher in the wake of this morning’s stronger-than-expected data (i.e. import prices, Empire manufacturing, industrial production).  


    Indeed, while off the earlier highs in the afternoon trade, the underperforming benchmark 10y note yield is last 2.4bps higher at 4.31% while the 2s10s spread is 1.8bps wider at -71.2bps.   Meanwhile, red SOFR futures are 2 to 2.5 ticks softer while SOFR swap spreads have compressed across the board against the rise in underlying rates today with SOFR IRS volumes running at a below-average clip overall. 


    Looking ahead, strategists at SocGen expect the Fed “to keep policy on hold at the meeting next week,” noting that “solid August CPI and retail sales confirm 3Q strength, but not to a sufficient extent to alter the narrative for the Fed.”   While another hike is possible, the bank believe that “the data between now and the November meeting will dictate if/when the Fed will act again.”


    With strength in the data, SocGen’s economists have “pushed out the timing of a recession in the US to mid-2024.”  Against this backdrop, the bank has adjusted its Treasury forecasts to reflect “a later recession and the ‘high-for-longer’ regime and now expect the 10yT to end the year at 3.75% (our prior forecast 3.25%), gradually bottoming out at 3.25% in mid-2024.”  ScoGen expounds on its view below:


      ”…We revised our Treasury forecasts and now expect only a modest decline to 3.75% by year-end.  Yields should continue to decline in 2024, as we anticipate a recession by mid-year. With a later recession (than what we had previously anticipated, i.e. early 2024) and ‘high-for-longer’ policy rates, we now expect the 10yT yield to bottom at 3.25% by mid-2024 but start to rise again in 2H of next year when the economy starts to recover after a mild recession.


      “…In the event of a significant recession we are more bullish on Treasuries as the pace of Fed cuts should be more drastic than in our baseline. The 10y could bottom at 2.8% in 2Q next year, and the 2s10s curve could steepen to 50bp by the 3Q.


      “…If the long-expected recession fails to materialize, this would be bearish for Treasuries. Such a scenario could see the Fed maintaining high rates for much of next year. In such an event, the 10y yield could end 4Q23 at 4.5%, which is higher than its current level, and the curve could stay significantly inverted well into next year. We believe that a rise in the 10y close to 5% could trigger a tightening of financial conditions and a selloff in equities, thus preventing a precipitous rise in yields.”


    SOFR swaps -  2s -10.125bps (-0.125bps), 3s -14.5bps (-0.375bps), 5s -22bps (-0.25bps), 7s -31.125bps (-0.5bps), 10s -30.25bps (-0.75bps), 20s -65.25bps (-0.875bps), 30s -68.375bps (-0.75bps).



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