EUR Swaps: Flattening resisted as Bund gains; AFT's plans; DB on UFR

Chart numbers 14 Jun 2022
Flattening was resisted today to leave euro 10s/30s a tad steeper at the close against a backdrop of risk-off gains for Bunds and an EU deal pricing.

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  • Bund spikes and follows USTs higher

  • 10s/30s tests -66bps but comes back; DB on Dutch UFR impact   

  • France plans to issue €270bn in 2023 including a new 30y

  • New issues: EU


    Bund spikes and follows USTs higher

    A fourth down day for the Euro Stoxx in the wake of Putin's latest nuke comments and China’s hasty change in its Covid policy meant that the chill wind of risk off continued to blow across markets, with USTs rallying and Bunds spiking through the afternoon before being led higher by the front of the euro curve. ECB speak included Kazimir’s warning that it’s “too soon to celebrate an inflation peak” after flash HICP slowed in November, while the ECB’s union was definitely not celebrating its 4.07% pay rise for 2023 given that German inflation is running at over 11%.  


    EURIBORs gained 2-3bps in the reds and greens while swaps 2s/10s bull-steepened by 2bps to -26.8bps and 5s/10s rose by 2bps to -2.4bps. Asset swap spreads widened across the curve from the morning through most of the day as the Bund rallied and the EU priced a new 15y deal plus a smaller 30y tap. The Schatz ASW finished around 82.5bps, Bobl 78.9bps, Bund 74.4bps and Buxl 44.2bps.  


    Elsewhere, the euro inflation curve flattened as the front end took back some of yesterday’s big losses and 2y HICPx rose 2bps to 3.62% even though Brent futures lost another dollar and tested $78. Still, gas futures rose 11.5% to €150 as cold weather hit Europe, taking the future to its highest level since mid-October.


    10s/30s tests -66bps but comes back; DB on Dutch UFR impact   

    At the long end swaps 10s/30s is around a bp steeper at -63.5bps and ending near session highs after flattening sharply through Friday and Monday amid reports of UFR-driven interest from Dutch pension funds. Indeed 10s/30s briefly tested a new cycle low of -66bps today before coming back to -63.5bps. Strategists at Deutsche Bank take a look at the recent price action and find that the recent flattening takes valuations "to extremely stretched levels versus the 5s10s curve and implied vol.” They continue:


      “The announcement of a change to the Dutch liability curve last week is another contributing factor to consider, where the DNB endorsed the recommendation to switch to using the swap curve up to the 50y point, effective Jan 2023.”


      “The sector was already in the midst of a transition to referencing the 30Y from the 20Y point. The impact on aggregate funding ratios is estimated to be fairly mild at 0.4% (which is in stark contrast to the previous change which was then staggered over a number of years in order to reduce the impact).”


      “Essentially, this move continues the trend towards adopting a near full market based curve made possible due to the limited impact on funding ratios. There is also much more room to absorb the impact. The shift to 50Y will naturally introduce more exposure to the ultra long end. However it is also worth noting that ECB has highlighted euro area pension fund swap notional exposure between the 20y-30y sector and 30y+ sector is fairly similar in magnitude. With the caveat that no further sector breakdown is provided, it would suggest that there is potentially already a level of exposure, and can also perhaps argue that hedge activity is not strictly mechanically driven by the regulatory curve. Overall we retain the bias for term premia to correct higher.”


    France plans to issue €270bn in 2023 including a new 30y

    OATs underperformed  Bunds a touch today in the wake of the publication of the AFT’s financing programme for 2023, which confirms plans for two new 10y benchmarks and possibly a 30y.


    France intends to sell €270bn in OATs next year, net of buybacks, after selling €286.2bn in 2022. That includes plans for a new 3y, a new 5-6y, and, not before the second quarter, two new 10y OATs, all via auction. AFT will also examine the prospect of a new 30y to be sold via syndication. For new OATs with maturities of 2y or more, redemption dates will be changed to March or September.


    In linkers, AFT will auction a new 10y OATei  and, depending on market demand, a new 15-20y OATi via syndication. In total, inflation linked bonds will represent around 10% or €27bn of total issuance, after 9.7% or €25.4bn in 2022. Linker redemption dates will remain in March and July.


    AFT will also keep tapping its three green bonds according to market demand.


    New issues: EU

    • Sweden’s Intrum AB (Ba3/BB) is close to pricing a €450m 5.25y NC2 at 10% via Citi, GS (B&D) and SEB.


    • The EU today priced a new €6.548bn 15y 2.75% SURE Social bond at swaps +21bps and a €500m tap of its 2.5% Oct 2052 MFA deal at +66bps. Leads are Barclays (B&D), BofA, DB, DZ and SocGen. Books above €25bn and €10bn, respectively.


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


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