Long-end steepening and ASW tightening eyed
Long-end steepening and ASW tightening are two themes tentatively emerging as traders eye seasonal September flows. The 10s/30s swap steepened up to -13bps earlier (+1bp), the highest since early August. Elsewhere, longer-dated Bund asset swap spreads are trading 2-2.5bps tighter today.
One trader cautioned there could be volatility, “The market is still illiquid so I’m not sure everyone is looking to put them on just yet.” Furthermore, he added there were other factors driving euro curve steepening, "The dollar and sterling curves saw steepening yesterday and it feels pretty driven by these markets as well at the moment."
As for today, the Bund future was last trading near unchanged with the 10y yield around 0.98%. The EuroStoxx was up 0.3% and 10y BTP/Bund spread 4bps wider at 208bps.
Ahead, markets await US Michigan Consumer Sentiment data at 16:00 CET. "We are looking for a slightly higher number. Even if it's not, we don't think there will be much longevity to any rally," said a dealer.
Seasonal trading opportunities - Barclays
In its weekly rates research Barclays sees scope for EUR long-end steepening and tactical ASW shorts. It writes:
- “With the end of summer now only weeks away, euro area treasuries have completed c.68% of planned gross bond funding for the year. This puts them c.5pp behind relative to this point last year, pointing to room for heavy supply from September…
- “Overall, we see potential for syndicated supply in the region of €30bn, with deals from issuers including Germany, the Netherlands, France, Italy, Belgium and Greece. Furthermore, we do not rule out the possibility that other issuers could also decide to bring deals to market next month. In the context of this busy syndication pipeline, we see room for a meaningful increase in the average maturity of issuance moving from August to September, in line with the typical seasonal dynamic.
- "More supportively, however, redemptions will be notably heavy next month, totalling c.€114bn. This reflects a shift in redemption flows in the EGB market in recent years, with issuers increasingly concentrating redemptions in September. We expect heavy September redemptions to result in negative net supply for the month for Germany, Italy and several of the smaller issuers. Furthermore, we expect net supply for the EGB market as a whole to decline meaningfully month-on-month into September given heavy redemption flows, to a level close to zero.
- “In terms of market implications, we see room for anticipation of heavy September long-end supply to encourage steepening of EUR long-end curve and peripheral credit term structures in weeks ahead, in line with the typical seasonal pattern. In addition, we do not rule out that resumption of heavy supply could create tactical tightening opportunities in EUR ASWs.”