EUR Swaps: Bunds lag in rally; €800bn NGEU can swap

Abandoned swings
Bunds lagged rallies in USTs and gilts but yields still fell in a market seemingly content to oscillate. The NGEU has been cleared to swap by the EC.

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  • Bunds lag in market of action and reaction

  • NGEU to issue €150bn a year, allowed to use swaps

  • New issues


    Bunds lag in market of action and reaction

    Bund yields rallied 2bps in the morning session today to reach -28bps by lunchtime, slightly under-performing USTs and gilts in a session that traders said was defined more by illiquidity and see-sawing than by headlines or conviction trading.


    Asked if things were busy out in the market so far, one seasoned EUR swapper chuckled indulgently and said “we are still very much in Easter trading mode.”



    One area of oscillation that had caught his eye today though was in 3s6s basis, where a 1.4bps jump in the 6m fix yesterday has been followed by a 0.3bps drop today, which coupled with a +0.1bps move in 3m has led to a slight rebalancing after yesterday’s steepening move.


    And yet, asked what had driven these decent moves in 3s6s the swapper said that an obvious driver or flow behind them was elusive. “The 6m dropped quite sharply early in the week, so yesterday’s move was an over-correction and today’s move more like a sign that it is settling down.”


    He added that there has been some flow in 9y and 10y 3s6s, which have enjoyed better bids today. 


    Over into asset swap territory and in what was described as a continuation of themes seen yesterday, there were better bids in 5y and 10y ASWs, although they failed to move dramatically, with the Bobl ASW currently +0.6bps at 32.2bps and the Bund unch at 35.2bps. The Schatz ASW actually has widened more with a +0.9bp move to 20.7bps.


    Sovereign supply has been a big focus this week but today sees no auctions, leaving just the benchmark 20y syndicated sale from Ireland to catch the eye. So far that seems to be well-received, with order books running in excess of €30bn for the April 2031 bonds, for which the spread has been set at swaps -13bps.  


    Continuing the theme of oscillation, traders said that there was really no standout headline reason for yields to be lower in Bunds and elsewhere, especially give a strong start to the US corporate results season and generally positive economic news elsewhere, ad that today’s move is most easily explained as a reaction to yesterday’s sell-off.


    “The move in yields is a correction from yesterday’s sell-off (when the Bund yield rose 3bps to -26.25bps) but the flow is very quiet, as it has been for the last two weeks,” summed up the above swapper.  


    NGEU to issue €150bn a year, allowed to use swaps

    Euro markets are looking forwards to the arrival of the EU’s Recovery Fund (‘NextGenerationEU’ or NGEU) following the announcement by the European Commission yesterday (link).


    Interestingly, the NGEU will establish a network of primary dealers, will co-ordinate its plans with other SSA issuers, and is expressly allowed to use derivatives such as swaps: “…Swaps may only be used for the hedging of interest rate risks borne by Member States benefitting from loans. The costs for managing risks with derivatives shall be borne by the beneficiary of the risk management operation.” (link)


    Issuance is expected to begin from June or July, assuming no delay from legal challenges at the German Constitutional Court (which Commerzbank estimates could push first NGEU issuance back to October).


    Commerzbank adds that 2021 funding should amount to €55-60bn with a target of 30% Green supply. The EU sees a market absorption capacity of €15-20bn per month for an issuance volume of €150bn per year until the target size is met in 2026. The bank continues:


    “…NGEU will raise funds via bills and bonds with maturities of up to 31 years, and via auctions, syndications and private placements. The EC also seeks authorisation for swaps, repos, buybacks and retentions. Commercial Paper may be considered at a later stage. The Funding will not be done back-to-back, in contrast to SURE.


    “…(On the demand side) the already substantial presence of (foreign) central banks in SURE transactions will be pushed further as the ECB steadily raises its share towards the maximum of 50% for each ISIN.


    “…Once the fund has reached its final size of €805bn by end-2026 ("build-up phase"), net issuance will drop to zero and hence rollover as well as pre-funding of upcoming redemptions constitute the sole source of issuance needs ("roll-over phase")…All NGEU liabilities will have to be redeemed by Dec-2058, implying heavily negative net bond issuance during the final "wind-down phase".


    “… Although NGEU will likely deliver the largest net issuance across €-AAA issuers during the build-up phase, we expect gross issuance to hover around €40bn towards the roll-over phase, i.e. a fraction of Bund and OAT supply and rather comparable with DSLs and OLOs.


    “…NGEU increases (i.e. additional net issuance) seem unlikely for the time being considering the politics involved, while sovereign deficits and hence net funding needs will continue to rise in nominal terms.


    “…The large share of green paper implies incremental demand as well as a structural premium given the well-documented scarcity of green bonds, particularly vs. social/sustainable bonds


    “…The hunt for EU paper thus seems set to emerge as a structural theme and should keep EU well bid vs. the Supra and EGB peers even once the initial EUphoria cools down as the EU switches to high-frequency issuance. We therefore reiterate our strategic overweights vs. core EGBs.”


    ABN Amro is also positive about the arrival of such a major, new AAA issuer:


      “…The European Commission will be well able to raise the funds in a market hankering for AAA rated paper - we are bullish about EU bonds as we expect the search for yield to intensify.


      “…The liquidity of EU bonds is expected to improve significantly. Indeed, the EU curve will be comparable with the Dutch sovereign curve with regards to the size per line, which will be around EUR 10bn or even more. In addition, the EU will maintain a curve up to 30y in the coming years.


      “…Demand for AAA rated paper has increased over time due to regulation whilst the supply of this paper is relatively scarce, especially once we correct for ECB purchases. In addition, for foreign reserve managers, EU bonds will be an attractive alternative to German Bunds.


      “…Consequently, we judge that the issuance of EU bonds will result in a crowding in effect by investors, who left the market once the ECB started to buy significant amounts of bonds. This will all be supportive for EU bonds and provides an attractive environment for the EC to raise a significant amount of funds in the coming years. Recent new issue rounds under SURE indeed clearly showed that there is high demand for EU bonds.


    New issues

    • Ireland is preparing a €3.5bn 20y benchmark in the area of swaps +13bps. Books above €35bn. Leads are Barclays, BNPP, CFIREL, Danske, JPM and Nomura (B&D). (UPDATES)


    • Japan's Rakuten plans a €1bn perp NC6 at 4.25% as well as USD perp NC5 and perp NC10 at around 5% and 6%. Leads are GS (B&D), MS, Daiwa, BofA, Mizuho, SMBC Nikko and Citigroup.


    • NedWaterschaps plans a €500m 30y Dutch Water bond. Leads are DZ, SEB and TorDom. 


    • The World Bank's IDA is preparing a €1.75bn 15y Sustainability bond at swaps +4bps via DB, JPM, Natixis and SocGen. Books above €2bn.


    • Danish pumps giant Danfoss plans a €1.9bn 5y, 7.5y and 10y deal after meeting investors Apr 19. Leads are BNPP, Citi, Danske, Nordea and SEB.  


    • China Construction Bank Luxembourg is preparing EUR 3y and 5y Green bonds. Leads are ABC, ANZ, BKCOMM, BNPP, BofA, BOC, CCB, Citi, Commerzbank, CA, DB, DZ, ICBC, SocGen, StanChart and UBS.


    • Republic of Srpska plans to sell EUR 5y bonds in the near future through IMI Intesa Sanpaolo, SG and UniCredit.


    • Royal Schiphol NV is preparing to sell €300m 4y and €700m 12y bonds at swaps +35 and 67bps, respectively. Via BNPP (B&D), ING, Rabo and SMBC Nikko.


    • Anima Holdings plans to sell a €300m 7y bond at swaps +175bps. Leads are Akros, BNPP, Mediobanca, MPS and UniCredit. 


    • Neinor is preparing a €300m 5.5y NC2 Green bond at around 4.5%. Leads are CS, DB (B&D), JPM and Santander.


    • Tatra Bank plans a €300m 7y NC6 Green bond. Leads are BNPP, LBBW and RBI.


    Recently priced

    • Slovakia yesterday priced a €1.5bn 15y bond at swaps +9bps through Barclays, Natixis, TATRAB and UniCredit (B&D).


    • NIBC Bank yesterday priced a €500m 10y covered bond at swaps +9bps through Deka, DZ, ING (B&D), LBBW and NatWest.


    • MuniFin yesterday priced a €500m 7y bond at swaps-6bps through Danske, LBBW, MS and Nordea (B&D).


    • SGS Nederland BV yesterday priced €750m 6y bonds at swaps +40bps through Citi (B&D) and CS.