Long-end rangebound; ASW steady
The Bund is trading weaker, last down around 80 ticks, despite weakness in equities with the EuroStoxx losing 1%. The 10y BTP/Bund spread is widening for a second session, last up 2bps at 214bps.
Still, one euro trader said not to read too much into today’s price action in the Bund, “It’s probably the slowest week of the year so far,” he said, with Bund futures volumes running below average. At the same time, the euro new issuance calendar remains empty with no new issues pricing so far this week.
In sovereign supply, Germany launched a new 2y earlier selling €4.6bn at an average yield of 0.58% vs 0.34% and bid to cover of 1.3 vs 1.2. Further out, Austria was active in the longer-end, selling €600m 2032s and €400m 2044s.
In swaps, the longer-end of the curve has flattened back a touch with 10s/30s last -1bp at -17.25bps. “It’s not been doing much the past through sessions and has been trading from -15bp to -18bps,” pointed out one trader.
Bund asset swap spreads were last trading almost unchanged across the 5y to 30y sectors with last prices Bobl at 91.6bps (+0.1bp), Bund at 93.1bps (+0.1bp) and Buxl at 57.5bps (+0.1bp).
Narrowing bias on ASW - JP Morgan
In its weekly rates research JP Morgan holds a medium-term narrowing bias on swap spreads. It writes:
- “We continue to hold a medium term narrowing bias but would wait for few weeks to enter into outright narrower given poor liquidity and large risk aversion in the very short term.
- “In terms of specific trade recommendations, two weeks ago we recommended Bobl/Bund 6s swap spread curve flattener as low beta to Bund narrower, which was expected to offer some protection in case of persistent flight to quality or risk aversion.
- “The curve has flattened over the period and now on a short term regression we find that the Bobl/Bund swap spread box is too flat vs. the level of Bund swap spread and no longer expected to work as a proxy for narrower. Thus, we recommend investors taking profit on Sep22 Bobl/Bund 6s swap spread curve flattener which went from over 3bp to around flat currently.”