EUR Swaps: Bunds test highs; Lower TLTRO repayments

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Bunds tested the 2023 highs, while TLTRO repayments came in lower than consensus.

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  • Bunds test highs; Lower TLTRO repayments
  • Receive 5s/10s/30s swap fly - SG
  • New issues

    Bunds test highs; Lower TLTRO repayments
    The Bund rally showed little sign of abating today as the 10y future earlier tested yesterday’s 2023 highs around the 139 figure, later drifting back to be up 33 ticks at 138.55 while the 10y yield was marked around 2.135% (-2.25bp).

    In swaps, the 5y sector continues to richen with 2s/5s/10s around -36bps while in the longer-end 10s/30s continues to steepen and was last up 1.25bp at -53bps, about 7bps higher than the start of the week. Swap spreads are roughly 1bp tighter across the 5y to 30y sectors.

    Earlier, the ECB announced that banks made €63bn of voluntary TLTRO repayments versus the Bloomberg forecast of €213bn.

    The smaller than expected TLTRO repayment could mean that banks favour keeping the TLTRO funds in carry trades, such as long BTPs. The 10y BTP/Bund spread was last 1bp tighter at 181bps having already narrowed as much as 50bps this year (although, note that carry trades typically favour the shorter-end of the curve).

    Another interpretation of the lower TLTRO figure could be that banks favour holding onto the TLTRO funds for liquidity provisions. In the basis market, first IMM FRA-OIS is 0.7bp wider at 5.2bps while €STR-BOR is 0.8bp wider at 16.6bps.

    Elsewhere, strategists at Commerbank who were forecasting €100bn of TLTRO repayments, write: “We think that most banks who used TLTROs as an ECB carry trade with level-1 collateral used the repayment windows before year-end to reduce their balance sheet. Those who would incur an adverse LCR impact or who are still using TLTROs as cheap funding source for lower-quality collateral are more likely to stick with their borrowings until maturity.”


    Receive 5s/10s/30s swap fly - SG
    In its latest rates weekly, Societe Generale recommends receiving EUR 5s/10s/30s swap fly amid declining rates volatility. The bank targets 40bps and the trade has positive carry and roll down of +2.5bp/3m. It writes:

    Volatility declines: “Short rates vol may still temporarily spike if terminal rate expectations overshoot to new highs. But we believe the peak is behind us. It looks like EUR rates vol is following the usual pattern, declining when in a mature stage of monetary tightening. Jumbo rate hikes are over, and swaption vol ultimately follows realised volatility…The general view is that the ECB will hike until summer, then stop and watch the decline in core inflation. In our view, the risk of sticky inflation, declining more slowly than hoped and calling for an even more restrictive policy stance is under-priced. But this is a story for 2H23.”

    Receive fly: “The 5s/10s/30s tends to follow similar trends as rates volatility, with higher vol flattening the ultra-long end relative to shorter segments of the curve… (and) may hence be considered as a proxy for expressing a view in rates volatility… (The trade) typically generates positive carry and rolldown, which is consistent with the implicit idea of being short volatility. This may be considered as a benchmark for yield curve carry trades.

    Risks: “The risk of this trade most often comes from the 30y leg and receiving flow in this segment. We see a low risk of significant downward pressure in 30y maturity rates at this time of the year because of the issuance flow steepening the long end…”


    New issues

  • HeidelbergCement is pricing €750m 9y SLB at swaps +123bps through BNPP (B&D), Citi, Commerzbank, ING, SEB and Standard Chartered.

  • LBBW plans to sell EUR 3y Covered through DB, LBBW, Lloyds, SocGen and TD.