EUR Swaps: Spreads widen; Flies eyed

Financial chart 24 Nov 2021
Euro rate markets are rebounding, spreads are wider and some are eyeing cheap looking swap flies.

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  • Rebounding; Spreads wider 
  • Cheap looking 2s/10s/30s - Barclays

    Rebounding; Spreads wider
    Euro rate markets have bounced today, recouping some of Friday’s sharp selloff after US payrolls printed far stronger than expected. The Bund is off the highs but up 41 ticks and 10y cash is 4bps lower at 0.91% while Euribors have rallied around 0.5-1.5bps in the reds.

    “There’s not been a great deal… swap spreads are more bid and the BTP spread is pushing out again,” one trader reported.

    Bund asset swap spreads are up to 1.5bp wider while the 10y BTP/Bund spread is 5.5bps wider at 211bps. It comes after Moody’s downgraded Italy’s outlook to negative on Friday while today the centre-left coalition has collapsed.

    “Probably the ECB will be flexing its buying programme and looking to lend some more support (to BTPs) if needed,” one trader noted. 


    In swaps, the front-end has been relatively stable while the longer-end has been re-steepening with 10s/30s last +2bps at -16bps. "It maybe didn't steepen as much as some people thought it would last week and perhaps has further to go, even without as much supply coming this week," one trader reckoned. For more views on the long-end see research section below. 

    Ahead, US CPI on Wednesday is seen as a key cue for the euro market.


    Cheap looking 2s/10s/30s - Barclays
    In its weekly rates research Barclays finds EUR 2s/10s/30s “remains notably cheap” versus USD and GBP. It writes:

    • “We maintain our long in the belly of the 2s/10s/30s fly (entry: 86bp, current: 65bp). While EUR 2s/10s has been flattening meaningfully in recent weeks, it still appears on the steep side to us in a context of meaningful recessionary risks.

    • “Regarding the 10s/30s leg of the trade, we view risks as tilted towards steepening from current levels. Terminal rates have already repriced higher over the past week: we think terminal rate pricings will likely struggle to push sharply higher from here, given elevated growth risks and a quiet few weeks ahead with respect to central bank meetings.

    • “At the same time, we view seasonal factors as increasingly constructive for 10s/30s steepening, as market participants begin to prepare for resumption of heavy long-end supply from September.

    • “Overall therefore, bearing in mind current recession risks, we think that either 2s/10s is too steep or 10s/30s is too flat, pointing to room for further richening of the fly. Indeed, EUR 2s/10s/30s still looks notably cheap versus its USD/GBP counterparts, and also versus shorter end curves such as reds/greens.”