EUR Swaps: ECB eyed; More steepening while ASWs stabilise

ECB eyed; More steepening while ASWs steady
Euro markets are awaiting the BOE rate decision at 13:00 CET followed by the ECB decision at 14:15 CET. In the meantime, the Bund has been trading a narrow range and was last unchanged around 140.45 while the 10y yield was marked at 1.935%.

The ECB is expected to raise rates by 50bps. One trader speaking earlier reckoned the market is preparing itself for a hawkish tone, “Yesterday it felt like the Fed was trying to give some pushback against the market’s CPI reaction… The ECB might want to stress that the fight against inflation isn’t over yet,” he said.

Another trader said, "The ECB is priced in the market at 54bps so 75bps remains possible but not likely. They will draw some reassurance from a slight miss in inflation data and also the pace of TLTRO repayments which, even though there is a long way to go, suggests liquidity moving out of the system at a decent pace."

As for the press conference, he noted, "The market will be looking for guidance as to whether the next one will be 50bps, and also for any word about QT. But people aren't expecting the ECB to embrace active QT when passive QT hasn't really got going yet. Finally you can be sure that Lagarde's comments will be confusing and send the market spiking in whichever direction at some point. That's pretty standard."

In swaps, the steepening momentum continued first thing with 10s/30s climbing up to -58bps (+2bp), around 10bps steeper than yesterday’s open, before easing back a touch. To recap, the curve steepened sharply yesterday after the DFA’s announcement on next year’s Bund supply hit the long end.

Speaking about the flows behind the recent steepening move, one trader said, “I wouldn’t say it’s all been one way (paying)… Real money receiving has become less prominent and that’s helped the curve steepen.”

Elsewhere, Bund asset swap spreads have steadied and were around 1bp wider after the sharp tightening on Wednesday. “There’s been some profit-taking. Shorting spreads has been a popular and pretty successful trade,” a dealer said.

Bund ASW tightening - Commerzbank
Strategists at Commerzbank lower their target on Bund ASW tighteners following yesterday’s DFA announcement on next year’s Bund supply. The bank writes:

”The massive Bund swap spread tightening stands out with longer tenors tightening more than 5bp after the DFA announcement, accompanied by another massive 10-30y steepening. With the 2023 funding calendar published yesterday, we expect gross Bund issuance to rise to a record €301bn next year alongside €42bn in net BuBills. Although this renders risks for next year more balanced, the (duration-) supply wave argues for ongoing pressure on swap spreads. We extend our ASW-tightener after our 70bp target for Bund-spreads has been met, now targeting 55bp in the 10y spread (invoice) and 0bp for 30y (on-the-run spot) spreads."