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Rates testing recent multi-decade highs; 20y auction preview
As the Fed kicks off its two-day FOMC meeting, Treasury market participants are keeping their powder dry with yields nudging modestly higher after mixed housing data hit the tape earlier (i.e. housing starts -11.3% versus -0.9% consensus, building permits +6.9% versus -0.2% consensus).
The benchmark 10y note yield is last 4bps higher at 4.343% - a new multi-decade high - after hitting 4.36% earlier today, and just a touch above the high of roughly 4.34% hit last month. On the curve, the 2s10s spread is 0.4bps wider at -75bps while the 5s30s spread is 1.7bps narrower at -8.3bps as the belly underperforms today.
In SOFR-space, red SOFR futures are 1.5 to 3.5 ticks softer while SOFR swap spreads are narrowly mixed with the wings outperforming amid below-average SOFR IRS volumes overall. In the backdrop, just a handful of IG deals are seen pricing today amid a largely sullied risk tone (Dow -0.74%, S&P -0.68%, Nasdaq -0.85%).
Ahead, Treasury will auction $13bn reopened 20-year bonds (Aug43s) at 1pm today, $1bn larger in size from the last reopening auction in July. Heading into today’s supply, strategists at JP Morgan believe that some more cheapening of the issue is needed for a decent auction and they highlight the following:
- ”…The August auction cleared 1.1bp cheap to pre-auction levels, as the end-user share of demand fell slightly by 1.8%-pts to 88.6%. Notably, the investment manager share of demand remained roughly unchanged at 75.5%, while foreign demand declined by 1.9%-pts to 10.4%.
“…Since the last auction, 20-yields have risen 8bp. However the 20-year sector has outperformed along the curve over the period now appears modestly rich relative to the wings after adjusting for the level of 20-year yields, the slope of the 10s/30s curve, and the level of HG spreads (as a proxy for risk appetite).
“…Overall, with yields sitting near their cycle highs, and range vol declining in recent weeks, we think this should entice demand for (today’s) auction. However, risk appetite may be depressed ahead of the outcome of the FOMC meeting on Wednesday and given somewhat rich relative valuations, we think this supply may take a larger concession from current levels to digest smoothly.”
SOFR swaps -2s -10.75bps (unch), 3s -14.625bps (+0.125bps), 5s -22.125bps (-0.125bps), 7s -31.375bps (-0.125bps), 10s -29.875bps (unch), 20s -64.375bps (-0.375bps), 30s -67.625bps, (+0.125bps).
- Korean Ocean Business sold a $80m 5y FRN Formosa. The EMTN matures Oct 2028 and pays a coupon of O/N SOFR +97bps. Leads Sinopac, Shanghai Commercial, Standard Chartered. Announced Sep 19.
- National Bank of Australia sold a $350m 5y FRN Formosa. The Eurodollar matures Sep 2028 and pays a coupon of O/N SOFR +98bps. Lead SG Securities. Announced Sep 18.
- Danske Bank is working on a 3NC2 senior preferred benchmark via BofA, Citi, Danske, GS and TD. A3/A+/AA-.
- The Sydney-based NBN Corp plans a USD 144A 5y and/or 10y bond issue via BofA, Citi, JPM and MUFG.
- World Bank launched a $3.5bn 5y sustainable. Leads Barclays, Citi, HSBC and Nomura. Aaa/AAA. Launched at SOFR MS +34bps.
- UBS yesterday priced 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 yesterday priced 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 yesterday priced a $1.75bn 2-part ($900m long 3y and $850m 7y). Leads BNPP, BofA, JPM, Mizuho and Sancap.Baa2/BBB/BBB. +150bps and +185bps.