EUR Swaps: Bull flattening pulls 5s/10s through zero

Chart numbers 14 Jun 2022
Putin-sparked bull-flattening ahead of the Fed, BOE and SNB has driven euro 5s/10s through zero and pulled 10s/30s to fresh lows.

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  • Bull flattening pulls 5s/10s through zero, drags 10s/30s to -55bps

  • Repo to support spreads, warily positive on Bunds: Commerzbank

  • New issues


    Bull flattening pulls 5s/10s through zero, drags 10s/30s to -55bps

    Putin's threats and suggestions that Fed hawkishness is well-priced into the USD curve have both helped global fixed income – excluding gilts – rally into the FOMC's decision, with the Bund off morning highs but +63 ticks with spreads better bid again.


    Euro swaps 2s/10s has flattened further to -7.1bps (-8.0) as red EURIBORs lose another 4-5bps ahead of the Fed, BOE and SNB interest rate decisions this week. Similarly euro 5s/10s has inverted for the first time since September 2008 with the curve down to -1.1bps (-4.6). Further out, 10s/30s is down to a fresh low of –55bps (-4.9), putting 10s/30s in sight of historic closing flats of around -58bps (-65bps intra-day) tested during the 2008 financial crisis (for instance see Total Derivatives here, here and here).         


    In asset swaps, the move has seen the spread curve widen by 1.8-3.2bps with the Schatz back out to 100.2bps (+1.8) and the Bund at 85.7bps (+3.3bps). Ahead, whether euro issuance over the remainder of September can continue to run at this week’s high level may be moot until the risks around Ukraine become clearer, but the modest reaction in euro credit spreads and equities to today’s news from Russia is mildly encouraging.    


    For inflation, Dutch gas futures have shed their early gains and the front contract is now +0.7% despite Putin's sabre-rattling. Similarly Brent is back to +50 cents and euro inflation swaps are mixed with the very front end +4.5bps but the long end down -2bps with the EUR 5y5y forward lower at 2.23% (-4.25bps).     


    Repo to support spreads, warily positive on Bunds: Commerzbank  

    Ahead, analysts at Commerzbank this week survey the state of the repo market and the effect on spreads. They write:


      “Pass-through of the 75bp hike is once more proceeding uneven and in very volatile fashion. Specials are taking over the lead from GC and keep on pushing our specialness metrics. The hunt for pristine collateral thus remains huge in view of elevated volatility and ECB/macro uncertainty. We doubt that the transmission frictions will ease materially with a difficult quarter-end already looming large, while speculation about ECB adjustments continue.”


      “The persistent richening of repo premiums is keeping swap spreads underpinned. Combined with elevated uncertainty regarding the ECB terminal rate this will probably prevent a lasting ASW-tightening.”


    In the background, reports that that ECB is looking at the adjustments to the TLTRO lead Commerzbank to look for “targeted TLTRO tweaks” rather than reverse tiering, which the bank reckons would “exacerbate” the problem of the “leaky floor” and depo rate hikes “not transmitting evenly” across the euro money markets.


    As for market direction, the bank is warily positive.


      “Selling pressure looks set to subside after 10y Bund yields have tested the 1.95% intraday high from June and several market participants are said to be looking to buy close to the ECB's inflation target. Ahead of the Fed we suggest buying Bunds into dips for today.”


    New issues

    • Germany’s Joint Agencies trio of state promotional banks is preparing a EUR 7y Social bond via Commerzbank, DZ, Helaba, LBBW and UniCredit.


    • Ceske Drahy plans EUR 5y Green after investor calls through Erste, ING and UniCredit.


    • Sydbank is preparing a €500m Green 3y NC2 bond via BNPP, Danske, JPM, LBBW and Nykredit.


    • Central Bank of Savings Finland has delayed its planned EUR 2y Senior Preferred citing market conditions. Leads were DB, LBBW, Nordea and Op Corporate Bank.


    • ICO today priced a €500m long 5y Social bond at SPGBs +14bps. Leads are BNPP, Citi (B&D), HSBC and Santander. Books above €1.1bn.


    • Action Logement Services (ALS) today priced a €750m 15y Sustainability bond at OATs +53bps. Leads are JPM (B&D), Natixis, NatWest and SocGen. Books at €770m.


    • Austria today priced a €3.5bn 4y at swaps -59bps through BofA, Citi, DB, GS (B&D), JPM and UniCredit. Books above €9bn.


    • CCCIF today priced a €500m 5y at OATs +48bps. Leads are Commerzbank (B&D), Natixis and SocGen. Books above €720m