USD Swaps: USTs flatten; Shutdown talk

Financial chart 24 Nov 2021
The UST curve flattened with curve move eclipsing the outright move. IG new issuance priced $14.8bn. JP Morgan examines impact of shutdowns on USTs.

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  • USTs flatten; Shutdown talk

  • Zero-coupon callables

  • New issues


    USTs flatten; Shutdown talk

    Treasuries have seen a flattening move today with front end yields up to 2.7bps higher while the back end sees yields down around the same magnitude. The 10y note yield is last 4.319% or 1.7bps lower in yield while 2s10s has dropped 4.3bps to -75bps while 5s30s is last 2.4bps lower at -7bps. Equities are closing near unchanged (DJIA +0.01%, S&P +0.07% and Nasdaq -0.07%).


    The swap spread curve steepened out versus the underlying flattening of the curve amid mixed volumes with the highest activity seen in the 3y, 5y and 10y maturities. IG new issuance saw $14.8bn (ex-SSA), with $7bn coming from Yankee FIGs (UBS' $4.5bn 3-part, BMO's $2.5bn 3-part).


    Meanwhile, looking ahead toward the possibility of a government shutdown, one source believed “a shutdown is happening as there is no alternative politically ” and noted cynically that all it does is “cost the taxpayers as it just gives Federal workers a holiday.”


    As for the potential impact of a shutdown on USTs, analysts at JP Morgan find that “even while essential operations of the government would continue to function in the event of a shutdown, such an event would likely impact the Treasury market.”


    Indeed, when examining the impact of the prior four instances in which Congress has failed to pass appropriations legislation (or CR or Continuing Resolution) before the deadline, resulting in a government shutdown lasting longer than a business day, JP Morgan finds that 10y yields “started to decline three weeks prior to the CR expiry in each scenario, falling in aggregate by an average of 14bp over this period.”


    “Further, yields tended to continue lower in the weeks following the declaration of a government shutdown, with a more protracted government shutdown associated with a larger decline in yields” the banknotes.


    With this history as a guide, this would leave a risk that “Treasury yields could fall as we approach the CR expiry on September 30, particularly if the likelihood of a shutdown increases and risk sentiment wanes” the bank points out.  


    However, the bank also sees risk that could portend a different outcome this time around, “as the stance and expected path of monetary policy are arguably quite different” than in previous episodes which were largely taking place in rate lowering periods.


    Thus, in the current environment, “with the Fed likely to deliver a hawkish hold next week, and market participants already skittish about the impact of increasing Treasury duration supply, any perceived lack of ability to govern might actually drive Treasury yields higher in the coming weeks,” JP Morgan suggests.


    2s -10.75bps (-0.75bps), 3s -14.625bps (-0.25bps), 5s -22bps (+0.125bps), 7s -31bps (unch), 10s -29.75bps (+0.25bps), 20s -64bps (+1bps), 30s -67.5bps (+1.125bps).



    Zero-coupon callables


    • Bank of Nova Scotia sold a $30m 20y NC8 zero coupon callable (non-Formosa). The EMTN matures Sep 2043 and is callable annually starting Sep 2031. Self-led. Estimated IRR 6.26%. Announced Sep 14.


    New issues

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


    • World Bank is working on a $TBA 5y sustainable. Leads Barclays, Citi, HSBC and Nomura. Aaa/AAA. Price talk SOFR MS +35bps area. Expected to price tomorrow.  


    • The Sydney-based NBN Corp plans a USD 144A 5y and/or 10y bond issue via BofA, Citi, JPM and MUFG.


    • UBS launched a $4.5bn 3-part ($1.25bn 4.25y NC3.25, $1.5bn 6y NC5 and $1.75bn 11y NC10). +160bps, +180bps and +200bps respectively. Self-led. A-/A.


    • Bank of Montreal launched a $2.5bn 3-part ($1.2bn 2y, $300m 2y FRN and $1bn 5y). Leads BMO, BofAML, GS, JPM and SocGen. A2/A-/AA-. +87bps, SOFR +95bps and +127bps.   


    • AerCap Ireland launched a $1.75bn 2-part ($900m long 3y and $850m 7y). Leads BNPP, BofA, JPM, Mizuho and Sancap.Baa2/BBB/BBB. +150bps and +185bps.


    • Enbridge priced a $2bn 2-part ($750m 60y NC5 fixed to fixed and a $1.25bn 60y NC10 fixed to fixed). Leads MS, RBC, Barclays, Citi and JPM. Baa3/BBB-/BBB-. 8.25% and 8.5%. Coupon for 60y NC5 steps up at year 10 at initial credit spread +25bps, then year 25 at initial credit spread +100bps. Coupon for 60y NC10 steps up at year 10 at initial credit spread +25bps, then year 30 at initial credit spread +100bps.     


    • Hyundai Capital priced a $2bn 3-part USD benchmark bond ($700m 3y, $800m 5y and $500m 7y fixed) via BNPP, BofA, HSBC, JPM, Lloyds and MUFG. Baa1/BBB+. +125bps, +165bps and +183bps. It dropped plans for a 3y FRN.


    • TTX priced a $300m 3y. Leads BofA, Citi and JPM. A/A. +80bps.


    • Interstate Power and Light priced a $300m 10y. Leads BofA, Mizuho, MUFG, USB and WFS. Baa1/A-. +145bps.


    • Public Service Co. of New Hampshire priced a $300m 10y FMB fixed. Leads BofA, GS, PNC, RBCCM and TD. A1/A+/A+.+105bps.   


    • UAE priced a $1.5bn 10y. Leads ADCB, BNPP, Citi, NBD IB, FAB, GS, HSBC, MASHBK and Mizuho. Aa2/AA-. +60bps.  


    • LG Energy priced a $1bn 2-part 144A Green bonds consisting of $400m 3y at +100bps and $600m 5y at +130bps. Via BofA, Citi, MS, Standard Chartered and KDB. Baa1/BBB+.


    • NStar Electric priced a $150m 5y. Leads BofA, GS, RBCCM. TD and PNC. A1/A/A+. +115bps.


    • FWD Group dropped plans for a 10y benchmark 10y, 144A bond at around +290bps via HSBC, JPM, Mizuho, MS and Standard Chartered. Baa2/BBB+.