EUR Swaps: Steady 10s/30s interest persists; Dutch PFs in '23

Steady 10s30s interest persists

With the futures roll safely out of the way, and little in the way of headlines to drive market direction, traders described trading conditions in EUR fixed income as extremely quiet today, with the 10s/30s curve and ASWs providing what little interest there has been so far.

10s/30s has been flattening steadily so far this month and there is still pressure today. One EUR rates trader said this lunchtime that “it may be Dutch pension fund flow (related or otherwise to the recent UFR changes for that group, see Total Derivatives and BofA below) behind this. What we are seeing is regular receiving pressure on levels in 30y swaps whenever it gets near to 2%. They aren’t going in size, but it is regular pressure that keeps re-emerging.”

The 30y swap has rallied from 2.69% in mid-October to just under 1.90%, but the lower level hasn’t totally stamped out this flow which has today seen 10s/30s IRS flattening another bp to 64bps today.

And over in asset swaps, the 10y ASW has been particularly busy due to futures roll activity earlier this week and the above swapper said that having been offered for a few days up to and including yesterday. But this morning there was a better bid in the asset swap with the spread at around 73.4bps.

Beyond that though, said the swapper, it has been “very, very quiet,” as the market slips into a test run of Christmas trading conditions ahead of a possible burst of activity as major central banks make their last rate verdicts for 2022 next week.

Dutch PF changes seen contributing to long end flattening: BofA

With 10s/30s swaps still down at -64bps, not far above its recent low around -66bps, and 30s/50s at -48.9bps (-0.7), banks continue to assess the impact of Dutch pension fund hedging after flows from the sector contributed to the leg lower in the curve at the end of last week and into Monday.

BofA reckons that, beyond dynamic hedging, five factors are likely to influence Dutch funds' behaviour heading into 2023, with these factors, on balance, supporting “more duration buying” and more curve flattening. BofA's macro outlook also points to more flattening pressure on 2s/10s at the same time. 

The five pension fund factors are:

• Reform and transition from DB to DC: “Expected to pass by early 2023 (potentially before the year-end). The transition to the new system would then start from 1 July 2023…The new pension contract with no fixed entitlements can be interpreted as structurally bearish for the long and ultra-long-end of the EUR swaps curve over the long term.”

   

  “This can represent a major structural change for the very long-end of the EUR swaps curve, as it would remove the counter-cyclical dynamic hedging feature of Dutch PFs, and could also mean that Dutch PFs are no longer receivers in the less liquid 30y+ part of the curve (where they appear to account for the bulk of the net-receive positions). We would however not go as far as saying that the switch will drive funds to close their received swaps positions. Those can still generate the risk-free returns that older pension members would require on their portfolios.”

   

• Higher funding ratios: ”Funds have scope to transition to the new pension system in a more comfortable position. Funding ratios are now well above the minimum target funding ratio of 95% needed by the time of the switch to the new system => This suggests potential for increased swaps receiving flows / buying of duration, as the funds strive to protect these ratios against a scenario of rates rallying during the transition period.

   

• Big indexations for 2023: “The improvement in policy funding ratios…drove most funds to announce much larger indexation levels for Jan-23. Most of these were decided/announced over the last few weeks only….(Consequently) funding ratios will drop in early 2023, making it even more relevant to lock in those ratios (protect the buffers) in view of the transition, and in a context where consensus is for lower yields in the years to come….Interest rate hedge ratios will also mechanically decline as the DV01 of the liabilities rise while that of the assets & swaps positions is unchanged…

   

  “Data for mid-2022 point to an average interest rate hedge of about 58% across funds, up from sub-50% two years ago….To fully offset the impact of indexation on interest hedge ratios among the largest five funds (which may correspond to a c.3.5ppt decline), a back-of-the-envelope calculation assuming liabilities have a duration of 15-20y would point to the need for around €40-60mn/01 of receiving/duration buying over time, for the top-five funds together.”

   

• Change in the UFR: “The change involves a move in the last liquid point from the 30y to the 50y…This means that the discount curve will match the Euribor swaps curve up to the 50y point, and it thereby increases the sensitivity of the liabilities to the 30-50y swaps rates. However, we believe the implied change in sensitivity is not very large given the current extrapolation methodology beyond the 30y point already incorporated longer dated market forwards….For the funds that are strictly following the DNB curve, this could bring forward their receiving activity in the 30-50y from Jan-24 to Jan-23…The increased sensitivity of the funding ratios to 30y+ rates should add to the pressure for the funds to keep their interest rate hedge ratios elevated.

   

• Portfolio rebalancing after risk asset performance: “These point to the potential for some rebalancing into bonds over the coming months. Selling of alternative, less-liquid assets could also help raise the amount of cash holdings - consistent with the efforts to make the system more resilient to large and rapid market moves, following the UK's experience.”

KfW’s first digital issuance via Clearstream D7 platform and DB

Clearstream today announced that KfW had become the first issuer to launch a digital fixed-income bond in the form of central register security based on the German Electronic Securities Act (eWpG). The issue was carried out by Clearstream on Deutsche Börse’s D7 digital post-trade platform. The transaction involves a bond with a volume of EUR 20 million, a term of two years and a coupon of 2.381%. Deutsche Bank acted as lead manager. For more, see Total Derivatives.

New issues: EU takedown confirms bank demand

• The EU yesterday 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.

   

  Data released by the EU shows sizeable demand for both bonds from ‘bank treasuries’ and/or ‘banks’, potentially on asset swap:

   

  Bank treasuries: 15y 45.1% (€2.95bn); 30y 36.0% (€180m)

  Banks: 15y 0%; 30y 11.5% (€58m)

  Central banks: 15y 12.8% (€0.838m); 30y 13.0% (€65m)

  Fund managers: 15y 29.1% (€1.91bn); 30y 28.5% (€143m)

  Hedge funds: 15y 0%; 30y 3.4% (€17m)

  Insurers and PFs: 15y 11.1% (€727m); 30y 7.5% (€38m)

   

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