EUR Swaps: Bunds steeper and wider as EU confirmed; TLTRO talk

Steep path 21 Jun 2021
With the year's central bank climax looming, trade was thin and surprising as Bunds brushed off data to rally, and the EU confirmed a brace of bonds.

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  • Bunds bull-steepen ahead of annual climax; ASW wider as EU confirmed

  • BNPP: €300bn TLTRO III repayments expected

  • New issues: EU dual-tranche


    Bunds bull-steepen ahead of annual climax; ASW wider as EU confirmed

    Like all good soap operas, 2022 is set to effectively end with a climax next week when the FOMC meets next Wednesday followed the next day by the BOE and ECB. But before then traders in the EUR fixed income market report an understandable lull, with new issuance on the wane except for tomorrow's EU dual-tranche, and only limited flows in core markets, contributing to some counter-intuitive price action.


    One swapper at an active market participant said this lunchtime in London that “Bunds have been a bit of a puzzle, but there’s not much liquidity so flows do have more of an impact.”


    He said that the “strong US data yesterday (ISM Services in particular) saw a bit of weakness and European data this morning (German factory orders) should have seen the sell-off continuing, but its rallying across the curve and I really can’t work out why.”


    The bull-steepening tone that has seen the front-end lead the way, with some support from semi-dovish comments from ECB chief economist Lane, has sent the Schatz yield 6bps lower to 2.05% following an OK auction, while Bund yields are down 5bps and the Buxl -3bps, to a 3-month low of 1.64% as mild bull-steepening replaces the recent preference for long-end outperformance.


    At the start of the morning the ECB’s Lane said that he was “reasonably confident” that the Eurozone is “likely… close to peak inflation” and said the ECB “should take into account the scale of what we have already done” in terms of rate hikes.  EUR 5y5y inflation has slipped to 2.36% (-3bps) today after approaching the top of its recent range yesterday, while Brent is down a dollar and under $82.


    And looking at the Bund curve this morning, Commerzbank presciently said it saw scope for some re-steepening after a sharp flattening in 10s30s. “While Bunds are struggling to find direction, the collapse of the ultra-long curve sticks out. Spillovers from Friday's US flattening, hawkish ECB rates comments and austerity talk at the sides of the Eurogroup meeting all fit the picture, and the missing EU deal may also have contributed,” it said. 


    Bang on cue, the EU this morning announced that it has mandated Barclays, BofA, Deutsche Bank and SocGen to lead a new Dec 37 (15y), €6.548bn benchmark SURE Social Bond and a €500m tap of its 2.5% Oct 2052 benchmark, to be launched tomorrow. 


    Amid the usual speculation about demand for the EU deal on asset swap, the Bund spread is +1.1bps at 78.0bps, the Schatz spread is +2.8bps at 87.1bps, the Bobl is +2.1bps at 84.9bps and the Buxl is +0.6bps at 47.8bps, as spreads across the curve reverse some of their recent tightening.


    BNPP: €300bn TLTRO III repayments expected

    Looking to the end of this week and strategists at BNPP reminded us this morning that the deadline for banks to notify their NCBs of early TLTRO III repayments is tomorrow, with the results to be published on Friday.


    BNPP said that “we expect more than EUR300bn repayments out of EUR1.1trn TLTROs expiring by June 2023. CP issuance should pick up further from here, implying a normalisation of Euribors, i.e. higher rates and wider ESTR/BOR basis. The new year should be particularly favourable for such a normalization, with the end of year effect passed as well as the approaching end of the hiking cycle, which is favourable in itself for a normalization of the fixings versus their fundamentals. Hence we remain long ESTR/BOR out of March 2023.”​


    Other banks expect more, with UniCredit looking for a €400-600bn repayment after a lower-than-expected €296bn came back last month.


    New issues: EU dual-tranche

    • The EU plans a new €6.548bn 15y SURE Social bond and a €500m tap of its 2.5% Oct 2052 MFA deal. Leads are Barclays, BofA, DB, DZ and SocGen. Expected to launch Dec 7.


    • TD Bank plans a €1.25bn 7y at swaps +110bps. Leads are Barclays, DB, Commerz, ING, SocGen and TD. Books above €2.1bn.


    • Sweden’s Intrum AB (Ba3/BB) is preparing a €300m 5.25y NC2 via Citi, GS (B&D) and SEB.


    • Alpha Bank plans a €400m 4.5y NC3.5 at 7.75% through BNPP, DB, GS and MS. 


    • French telecom Iliad SA yesterday sold a €750m 4.5y at 5.375%. Leads are BofA, CA, CIC (B&D), Natixis and SocGen.