Front-end weaker into US CPI
The front-end is trading slightly weaker into US CPI data due at 14:30 CET, just as it was ahead of last Friday’s NFP data. Front Euribors are up to 4.5bps lower with ERZ2 last -4bps at 99.72. Reds are down by a similar amount albeit in low volumes of 15-30k per contract.
"We were expecting the larger NFP print on Friday, but I think there were some that got burnt and didn't think that, one, it would come in so much higher and, two, a higher print would have such an impact," said one trader today.
Elsewhere, the Bund is paring earlier gains and was last up 22 ticks having rallied up to 75 ticks earlier in the session.
Swap spreads are 1-2bp wider with the 10y Bund ASW marked near 94bps and testing recent highs. "We've seen some interest to enter tighteners," one trader reported, adding it was a typical seasonal play with some looking for spreads to start narrowing in a couple of weeks.
In swaps, the curve is flatter with last prices 2s/5s at 17.5bps (-1.75bp), 5s/10s at 22.5bps (-2.25bp) and 10s/30s at -17.5bps (-1.75bp).
Seasonality and swap spreads - BofA
In its weekly rates research BofA looks at seasonal and fundamental factors that may support spread tightening. It writes:
- “If the supply outlook for the periphery looks ok for the rest of the year and before the acceleration of 2023, the same cannot be said for core and semi-core.
- “Before accounting for secondary market sales (a significant source of funding for Germany, at around €50bn for the year) and for the effect of PEPP re-investment flexibility, net supply for core/semi-core from August to December is expected at around €60bn. Including secondary market sales for Germany, as well as PEPP flexibility, the private market could see around €110bn in positive supply over the same period (compared with deeply negative balances each year since 2015).
- “If risk events (Italian elections permitting) and the higher rates trend normalizes (reducing the need to hedge against higher rates through swaps), it is unlikely the market continues to see the continuation of the widening trend seen so far.
- “True, the scarcity of safe-haven assets in the Euro Area is still very much an issue but the premium embedded in swap spreads already trades at historical highs and currently also trades wider than expected values.”