EUR Swaps: Asset swap spreads widen as shorts covered

Line chart 25 Mar 2021
Euro fixed income has rallied and Bund asset swap spreads are wider.

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  • Asset swap spreads widen
  • EUR 10s/30s steepening bias - JPM
  • New issues

    Asset swap spreads widen
    Euro fixed income has rallied, marking a continuation of yesterday afternoon’s post-US CPI rally in US Treasuries.

    The 10y Bund future was last up 1.25 points while the 10y yield declined by 9.5bp to 1.83%. The front-end has also posted gains and reversed yesterday’s selloff, “Volumes are thin and you cannot read too much into it though,” stressed one trader.

    Elsewhere, Bund asset swap spreads have widened by 2.5-5bps, “Some accounts have been quick to take off speculative shorts,” said one trader, “Issuance has disappeared and it makes sense when markets are a bit thinner,” he added, referring to today’s US Thanksgiving holiday.


    Meanwhile, the standout euro issuer in today's market has been Nordea Mortgage Bank's €1bn 3y Green Covered sale. 


    Across the swap curve, the 2s/10s segment continues to see flattening with 2s/5s at -21.25bp (-2bp) and 5s/10s at -4bp (-1bp).


    Further out, 10s/30s has steepened up a touch to -52bps (+1bp), “We flattened a lot yesterday and are now coming back, but not seeing much flow,” a trader said.


    EUR 10s/30s steepening bias - JPM
    In its 2023 rates outlook JP Morgan holds a “high conviction” on steepening of EUR 10s/30s over the course of 2023. It writes:

    • “Analysis of the performance of 10s/30s swap curve around prior ECB last hikes suggests that 10s/30s swap curve steepeners start becoming profitable, on average, around 4-6m before the last hike. This is in line with our expectation that the swap curve will steepen outside-in as we exit the hiking cycle.

    • “At current levels, 10s/30s swap curve is trading marginally too flat versus fundamental drivers such as blues yield (3y1y, proxy for ECB hiking cycle, quadratic fit to capture the convexity of the swap curve versus yields), VIX (proxy for risk-off dynamic which has historically triggered flows supporting flatter curve), 10s/30s USD swap curve (capture global long-end dynamics), ECB b/s as a % of GDP (to capture the impact of QE on the curve), and one-off adjustments via dummies to capture ECB PEPP announcement (18th March 2020) and ECB 2022 January meeting…

    • “However, we see non-trivial risk of further increase in blues yield over the near term at least until we have clarity on final rate hike which poses a near-term risk to our 10s/30s steepening bias. Similarly, we expect a bear-flattening of the 10s/30s USD curve over the course of 1H23 followed by a re-steepening of that curve in 2H23. Thus, outright 10s/30s swap curve steepeners are likely to experience some volatility until the last ECB hike… To mitigate the near-term risk of bear-flattening, we recommend 10s/30s bull steepeners implemented via 3M/6M expiry receivers and then gradually roll these exposures into outright steepeners (10s/30s and/or 5s/30s) as we get closer to the last hike.”


    New issues

  • State of Hesse is tapping €500m 2.65% 2027 at swaps -18bps through Commerzbank, Deka, DB (B&D), LBBW and Rabo.

  • CVA SpA may sell €500m (max) 5y next week through BNPP, GS, IMI, Mediobanca and UniCredit.

  • Metso Outotec plans to sell €300m (max) 5y through Citi, Commerzbank, Nordea and SEB.

  • Nordea Mortgage Bank is pricing €1bn 3y Green Covered at swaps +2bps through BNPP (B&D), DB, HSBC, Nordea and UBS.