10s/30s flatter again; ASWs re-widen
Bunds performance sat between USTs and gilts this morning with the former still unsettled by Friday’s strong hourly earnings numbers while the latter was supported by some dovish BOE speak over the weekend. Meanwhile the decision by S&P to downgrade France’s rating outlook to ‘Negative’ was shrugged off by EGBs as OATs tracked Bunds closely today while BTPs outperformed, pulling the 10y BTP-Bund spread around 4bps tighter. EURIBORs are 0.5-3.5bps weaker in the reds and greens after the ECB's Makhlouf pointed to a 50bps hike later this month while Villeroy said that was too early to discuss the terminal rate.
Against this backdrop the the euro swap curve is bull-flattening with gains at the long end helping to pull 2s/10s down to -28.2bps (-1.9) while 10s/30 is more inverted at -65.1bps (-3.1), after reports that some of the recent flattening in 30s/50s - down 0.9bp to -46.4bps today – was related to recent changes in Dutch PFs UFR (see the section in Total Derivatives).
Swap flys are 1.5-2.0bps higher at -19.3bps in 2s/5s/10s and 60.7bps in 5s/10s/30s. And asset swaps have renewed their pre-NFP widening with Schatz at 84.9bps (+3.1), Bobl at 82.4bps (+1.4) and Bund at 77.1bps (+1.1).
Hedged Bund ASW tighteners: Barclays
Position for Bund ASW vs €STR tighteners but “with a risk-off hedge” via a peripheral spread widener, suggest analysts at Barclays this week.
The bank remains “cautious” on "overly" directional trades given the still-high level of euro inflation. It reckons instead that German ASW shorts, complemented by spread wideners in 2y Spain versus Germany, can perform "across a range of potential macro scenarios” including both downside and upside inflation surprises. The bank continues:
- “German ASWs have been trading with a tightening bias for much of Q4, aided by a drift lower in EUR rate vol (alongside relatively healthy swapped issuance flows). Even after the recent leg of tightening, however, we still view Bund ASWs as meaningfully expensive relative to fair value.”
In particular, Barclays points to the “daunting” supply/demand burden faced by the EGB market next year alongside “the likely commencement of ECB QT, GFA repo market interventions and upcoming TLTRO repayments,” all of which are expected to help alleviate the Eurozone’s shortage of high quality collateral.
- “We think focus on repo market conditions from European policymakers in recent months (eg, lifting of the 0% remuneration cap on Eurosystem government deposits, raising of the ceiling on the Securities Lending Programme’s cash collateral option) points towards attractive risk/reward for EUR ASW tightening trades.”
Barclays also sees flows in swaps contributing to tighter spreads:
- “Relatively more balanced flows in swaps over the medium-term versus earlier this year (as the ECB’s hiking cycle matures and focus on growth risks builds) should also encourage EUR ASW tightening, all else equal.”
Finally, the bank judges that peripheral spreads appear “notably” tight versus credit indices as well as against the level of yields.
“We think this dislocation has likely been magnified by short covering in the periphery, with spread widening trades having been relatively crowded at the start of Q4,” it says, and views short tenor Spain-Germany EGB spread wideners as a risk-off hedge:
- “If a notable risk-off episode occurs in the coming months (e.g. on the back of crystallisation of geopolitical risks, or a sharp deterioration of economic dataflow), we see significant room for catch-up widening. In the latter scenario, we do not rule out the possibility that our Bund ASW short could face some flight-to-quality widening pressures”
- The EU is expected to launch a syndication in the week beginning Dec 5 after sending any RfP to dealers on Nov 24.
- French telecom Iliad SA (Ba2/BB) plans a €750m 4.5y at around 5.375%. Leads are BofA, CA, CIC (B&D), Natixis and SocGen.
- Sweden’s Intrum AB (Ba3/BB) is preparing a €300m 5.25y NC2 via Citi, GS (B&D) and SEB.
- Alpha Bank plans a €300m 4.5y NC3.5 through BNPP, DB, GS and MS.