HALISTER1: TD Recommends 5y Swap Spread Tightener Based on Deficit Outlook

TD Recommends 5y Swap Spread Tightener Based on Deficit Outlook

(Bloomberg) -- Swap spread widening driven by expectations for regulatory rollback and repo clearing initiatives “has been overdone,” TD strategists Priya Misra and Gennadiy Goldberg say in note.
  • “Treasury supply is likely to pick up due to deficits and Fed portfolio runoff,” cheapening USTs vs swaps
  • They recommend 5y swap spread tightener at 13bp, target 5bp, stop at 17bp
  • Tax plan expected to be unveiled Wednesday is likely to raise deficits over a 10-year period, and swap spreads “have historically shown a strong relationship with budget deficits”
  • Fed balance sheet runoff should also cheapen USTs; TD expects additional issuance to be concentrated in sub-5yr sector
  • Also, May is typically the second-biggest month of the year for corporate bond sales, which can tighten swap spreads as issuance is hedged via receiving in swaps
  • Risks to trade include a federal government shutdown that sparks flight-to-quality, tax reform elements that lead to reduced corporate bond issuance and inclusion of money market funds in central repo clearing, which could lower dealer balance sheet costs

Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Gennadiy Goldberg (TD Securities USA LLC)
Priya Misra (TD Securities USA LLC)

To de-activate this alert, click here
To modify this alert, click here

UUID: 7947283