Halister News

(Bloomberg) -- Expected surge in corporate issuance after Labor Day should put pressure on intermediate and long-end swap spreads, while short-end spreads face widening pressure tied to money-market fund reform, strategists at TD and Citi say.

• TD initiates 2s5s swap spread flattener at -22.5bp, targeting -29bp, stop at -19.5bp, strategists led by Priya Misra say in note
  • Sept. tends to be busiest month for corporate issuance; this year, additional incentive created by recent widening of spreads that makes funding levels look attractive and prospect of Fed rate increase on Sept. 21
  • Intermediate spreads have seasonal tightening bias in Sept., most of which occurs during 2 wks after Labor Day
  • Concurrently, prime fund outflows could push Libor and short-dated swap spreads wider
• Corporate supply surge should put tightening pressure on 10Y, 30Y spreads, Citi strategist Ruslan Bikbov says in note; long-dated spreads tend to tighten during 3 wks after Labor Day (2010-2015 data)
  • Merely replacing the $9.5b of financial corporates maturing in Sept. would translate into receiving hedging needs of $8.3m DV01 per week on avg.; Citi expects up to $75b in gross financial issuance, $25b more than in Aug.
  • Combined with risks posed by MMF reform, “this argues for a further flattening of the spread curve”