EUR Swaps: Positioning and CPI eyed amid rally

Positioning and CPI
Bunds are posting gains alongside global fixed income with gilts outperforming today having begun rallying following the BOE unwind operation late yesterday, see GBP Swaps: Mystery late rally. The 10y Bund future was last up by one point while the 10y yield has declined by 5bps to 2.25%. Top right euro vol is down sharply again with 1m10y and 1m30y both around 5nvol lower. 

In euros, one market participant put today’s gains down to a few possible factors, “Supply has been taken down pretty well and used as an opportunity to cut some shorts. There’s probably also some covering ahead of the US CPI data tomorrow,” he added. “Positioning is probably a major factor,” he suggested. 

At the same time, he noted that dealers hedging large swapped issuance would also be buyers of futures. Meanwhile, the new issue pipeline remains robust with several banks in the mix across the 5y to 10y sector including Credit Agricole, Commerzbank and BBVA, plus benchmark SSA deals from MuniFin and EDC in 5y, and the World Bank in 10y.

In euro swaps, one recent theme has been outperformance of the 5y sector with the 2s/5s/10s swap fly continuing to richen and last marked around -29.5bps at multi-year lows. "You'd think there might be come hedge fund interest (to fade), but then considering we continue to richen it doesn't look that way," pointed out one source.

Across the swap curve, last prices were 2s/5s at -36bps (-4.25bp), 5s/10s at -6.5bps (-2.25bp) and 10s/30s at -58.25bps (+1.25bp). After narrowing over the last couple of days, 5y asset swaps are a touch tighter again at 63.3bps and relatively steady at 61.0bps in 10y. 

EUR 10s/30s steepening bias - JPM
In research published the end of last week, strategists at JP Morgan hold a medium-term steepening bias on EUR 10s/30s with the bank finding it too flat vs long-term fundamental drivers. It writes:

“We have a medium-term bullish duration bias on blue yields which is supportive of further steepening of the curve. In our view, a rally in yields is the primary structural factor responsible for steepening of the 10s/30s curve. This dynamic is expected to more than offset any impact coming from pension fund receiving flows at the ultra-long end of the curve… Overall, our 10s/30s steepening bias is primarily driven by bullish duration bias as we approach the end of the hiking cycle and market focusses on transitioning to an easing cycle leading to lower blue yields.”

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