EUR Swaps: BOJ adds impetus to sell-off; OATs underperform

BOJ adds impetus to sell-off
The Bank of Japan’s surprise move to widen its YCC trading band (see JPY Swaps) has hit global fixed income and pushed the Bund future a point lower while the 10y yield was last marked +10bp at 2.30%.

“Japan has brought new impetus into the market and the peak rate is being pushed higher in all countries,” remarked one euro trader.

In terms of flows and liquidity, sources say the market is “very much in holiday mode” with swap activity thinning out. “The Bund had a decent move but swaps are just seeing the odd clip trading… it’s not a day to try and get a great deal of business done,” said one. 

In the short-end, Euribor futures are trading up to 6bps lower in volumes of up to 60k in the red contracts. Across the curve the direction is steeper with last prices 2s/5s at -23.5bps (+2.5bp), 5s/10s at -5.5bps (+1.75bp) and 10s/30s at -67.5bps (+1bp).

Elsewhere, Bund asset swap spreads are mostly tighter, led by the long-end. Last prices were Schatz at 73.5bp (+0.8bp), Bobl at 66.4bps (-1.1bp), Bund at 62.1bps (-1.0bp) and Buxl at 25.2bps (-2.6bps).

Finally, OATs are underperforming Bunds with the future down more than 1.5 points albeit in lowish volume of 116K, while spreads to 10y Bunds are 2bps wider at 54bps. Deutsche Bank writes: "One of the implications of YCC was that it led Japanese investors to foreign DM bond markets amid their search for yield. FX-hedged foreign bond yields were indeed offering attractive yield pick up to Japanese investors relative to JGBs. This has changed in 2022 and will be further impacted by today's BoJ decisions. OATs have been the main beneficiaries within EGBs and should be most impacted."

EU plans €80bn H1 issuance; Huge jump EGB net supply - DB
The European Union announced yesterday that it has a €80bn issuance target for H1 2023 with the split €70bn NGEU and €10bn MFA. For further details, including tweaks to auction and syndication plans, see here. 

Elsewhere, Deutsche Bank has updated its supply forecasts for 2023 and highlights the huge net increase due in Q1. 

“EGB net supply is expected to jump higher by 22% in 2023, at around €447bn (from €366bn in 2022)… Net-net EGB supply will climb to €549bn in 2023, €372bn higher than in 2022. That will be the largest amount of net-net EGB supply on record… In January and February alone net-net EGB supply is estimated at around €200bn vs €50-60bn in the last two years. This is the result of the usual front-loading of EGB supply via syndications in Q1 and the backloaded schedule of redemptions. The biggest difference though vs previous years is the absence of net ECB QE purchases.“

Tighter ASWs amid easing repo - Commerzbank
In a strategy note published today, Commerzbank expects further tightening pressure in ASWs as collateral scarcity eases. The bank writes:

• “In repo, specials have been trading the new depo level as of yesterday. As expected, transmission is proceeding smoothly with the 10 richest German specials as well as the average across all German ISINs rising above +46bp. This constitutes the by far highest depo pass-through in the current hiking cycle and adds weight to our earlier analysis that transmission is no longer a problem given the collateral supply flood.

  
  

• “That being said, the smooth pass-through is by and large due to the Finanzagentur's measures. The ECB does not want to be put into a corner again, however, but ensure proper transmission of future rate hikes (or cuts) as signalled by the "review of the operational framework for steering short-term interest rates" announced last Thursday.

  
  

• “This will keep speculation alive that more profound changes to collateral markets could be pending, in turn adding to the tightening pressure on ASW-spreads as potential competition compounds the structural re-pricing of the collateral scarcity premium on the back of the supply avalanche.”