Fly squashed by Fed
Catch-up with Treasuries’ post-Powell bull-steepening drove Bunds and EURIBORs today with 10y German yields rallying by 13bps through the morning to test 1.80% before coming back late in the session, but only to around 1.82%. Eurozone data included weak German retail sales (-2.8%mom) and some downward revisions to most of the preliminary PMI prints, with red and green EURIBORs gaining up to 15bps for Dec24 today versus a 25bps rally in Dec24 Eurodollars over the last 24 hours. BTPs outperformed as rates fell and the spread to 10y Bunds narrowed by 4.5bps.
Along the spread curve, asset swaps (against EURIBOR) widened in the rally by 2.5-3.5bps for the Schatz and the Bobl, but only around 0.5bps further out. €STR-BOR was also better paid with 5y widening further to 17.6bps (+0.7).
The rally in Bunds and swaps was led by the 5y area and 5s/10s IRS steepened through zero to 1.3bps (+1.4), while 2s/10s was a touch flatter at -21.5bps (-1.3) and 10s/30s steepened to -56.1bps (+1.1). Consequently, the 2s/5s/10s fly was squashed again to -24.2bps (-4.2), its lowest point since around September 2019 and heading for the -28bps lows last tested in June 2019.
In the background, euro vol continued its descent after the Fed's tilt to 50bps this month (see Total Derivatives) with 1m10y down around 4.1nvol, 1m30y 3.5nvol lower and 1y1y 3.1nvol softer.
Impact of UFR changes limited: Rabo
Strategists at Rabobank today review the decision by regulators at the DNB to introduce a new UFR for Dutch pension funds from January 1, 2023 (link) following the recommendations of the Parameters Committee (link). Note that this is separate from the reform proposals making their (slow) progress through the Netherlands parliament.
Rabo concludes that the changes to the UFR methodology will likely have only “a limited impact on the level of hedges” and also only “a minor impact” on the composition of hedges the pension sector.
In future, the UFR will be based on the 20y30y forward EUR swap rate rather than the 120 month average of the 1y30 forward, with the UFR starting at 30y rather than 50y. Rabo sets out the impact:
- “Limited changes in the hedging behaviour of Dutch Pension funds. The impact of the UFR was already severely reduced with the previous changes to the UFR and therefore these changes will likely have a minor impact on the size of hedges.”
- “Likely changes in the 'optimal' hedge composition for pension funds that base their hedging policy on the interest rate including the UFR. However, in our view the majority of the sector base their hedges on actual interest rates excluding the UFR and are therefore also unaffected.”
- “An increase in liabilities and therefore a decrease in coverage ratios. According to the DNB, these additional changes will result in an average decrease in coverage ratios of 0.4%. With coverage ratios well above 120% on average this is a limited impact. The lower the average age of the fund, the bigger the impact.”
- “A decrease in the overall impact of the UFR on liabilities. The discount rate for liabilities will be solely based on the 6M EURIBOR swap rates up to a tenor of 50y (up from 30y).”
- SocGen today priced a €1.5bn 8y NC7 SNP (Baa2/BBB) at swaps +180bps. Self-led.
- Credit Suisse (Switzerland) today priced a €750m 3y Swiss Covered bond at swaps +73bps. Leads are Commerzbank, CS (B&D), Danske, DZ, Helaba, ING and Natixis.
- ELO SACA is preparing a €650m 6y at swaps +250bps via BNPP, CA CIC, Natixis (B&D) and SocGen.
- Italy’s Illimity Bank (BB-) plans a €300m 3y at 6.625%. Leads are BNPP, GS and IMI (B&D).
- BPER today priced a €500m long 5y NC4 SNP at swaps +360bps. Leads are HSBC, MS, NatWest, UBS and UniCredit (B&D).