First BSBY swap executed

Prior week summary

The major U.S. equity indices ended the week mixed with the tech-heavy Nasdaq faring the worst as investors grappled with weaker-than-expected economic data, dovish comments from several Federal Reserve officials, and sustained improvement in the U.S. COVID-19 outlook. In a wild week for treasury yields, the 10-year treasury yield fell as low as 1.46% on Friday morning before recovering to end the week down roughly five basis points at 1.6%. While treasury yields have moved lower in the second quarter, inflation expectations have continued to rise. The 10-year breakeven inflation rate reached 2.5% on Friday, a level not seen since the first quarter of 2013. Several Federal Reserve officials held speaking engagements throughout the week and pushed back against the notion that a persistent rise in prices is in the offing. Federal Reserve Bank of Cleveland President Loretta Mester, often described as a hawk, downplayed concerns of firming price pressures in a speech to the Boston Economic Club on Wednesday saying, “Given that inflation has run low for so long, some increase in inflation expectations and actual inflation would be a welcomed development. I wouldn’t consider the increase in inflation I expect this year to be the type of sustainable increase needed to meet the forward guidance on our policy rate.” Boston Fed President Eric Rosengren echoed Mester’s comments on inflation and insisted that any talk of tapering asset purchases was premature. Rosengren did suggest that he was in favor of reducing MBS purchases faster than Treasuries when tapering begins, however. In a speech to the Boston College Carroll School of Management last week Rosengren said, “I do think that as we think about tapering one of the things that we are going to have to think about is at what speed we taper the Treasuries versus the mortgage-backed securities. The mortgage market probably doesn’t need as much support now. And in fact, one of my financial stability concerns would be if the housing market gets too overheated.”

In a busy week with several high-profile updates slated for release, the week’s economic data updates largely fell below expectations and suggested a moderation in economic activity. Monday’s release of the ISM Manufacturing Index fell below expectations to 60.7, far below the record-breaking 64.7 level seen in March. Analysts were quick to note that the miss in expectations was largely due to input constraints, particularly parts and labor, and not due to a lack of demand. Separately, respondents’ positive sentiment increased to a ratio of 11:1, up from 8:1 in March. Adding to the slate of misses, updates to construction spending, the ISM Services Index, factory orders, and wholesale inventories all fell below expectations. None of the above misses turned heads like Friday’s release of the non-farm payroll report. According to the report, the U.S. economy added 266,000 jobs in April, substantially lower than the one million jobs expected and marking one of the largest deviations from the consensus estimate in the report’s history. In a bright spot for the report, the leisure and hospitality sector added 331,000 jobs in April as COVID-19 restrictions eased around the country in response to downward-trending daily COVID-19 case counts. The unemployment rate ticked up to 6.1% from 6%. Finally, jobless claims fell to a pandemic-era low of 498,000 claims for the week ended May 1.

As non-SOFR-based alternatives to LIBOR continue to jockey for position, Bank of America and JPMorgan announced on Monday that they executed the first swap tied to the Bloomberg Short Term Bank Yield Index (BSBY) on the previous Friday. The BSBY-linked swap was a $250 million one-year basis swap with the other leg tied to SOFR. Bank of America and JPMorgan have both indicated that they do not believe the increased use of the BSBY index would hinder SOFR’s efforts for wider adoption with Thomas Pluta, global head of linear rates trading at JPMorgan, saying, “We’re all focused on transitioning off dollar LIBOR as soon as possible. This isn’t going to slow the SOFR transition down — if anything, it’s going to accelerate it.” Separately, ISDA released Supplements 72 and 73 to the 2006 ISDA Definitions on Thursday which outlines definitions for “USD-AMERIBOR Term” and “USD-BSBY.”

The look forward

Market participants are looking forward to the release of updated figures on the Consumer Price Index, the Producer Price Index, retail sales, and industrial production, among others. After Friday’s cyberattack on Colonial Pipeline Co. forced the closure of the U.S.’s largest oil-products pipeline, market participants will be eagerly awaiting developments on the reopening timeline.

Rates snapshot

Market implied policy path (Overnight indexed swap rates)