EUR Swaps: Pace of hikes; ASW profit-taking

Long-end gains; Lagarde questioned
The 10y Bund and longer-end of the euro curve continued to post gains today with the 10y yield last marked around 2.04% (-5bps). Overnight, the BOJ voted unanimously to keep its YCC policy unchanged, defying market expectations of adjustments or even a full policy abandonment, see JPY Swaps. 

Elsewhere, the front-end of the curve lagged behind with Euribors selling off first thing as Banque de France Governor Francois Villeroy said the ECB’s guidance for 50bps rate hikes remains valid. Yesterday Bloomberg reported the ECB may opt for a 25bp hike in March after a 50bp hike in February, citing unnamed ECB officials.

Speaking about a possible slowdown in the pace of rate hikes, one trader said, "It's not been enough to kill off the idea of 50bps rate hikes after Lagarde's hawkishness at the previous meeting. That said, Lagarde has let us down before."

Elsewhere, the pace of new issuance has slowed but several banks are still active in the 5y-7y sector. "There's been some more receiving. Some clients have been questioning this rally and are not sure what is going on," said one dealer. 

Bund asset swap spreads are mixed with the Bobl underperforming a touch, last 0.5bp tighter at 60bps. Meanwhile, one trader agreed it "probably makes sense" for anyone holding speculative tighteners to cut back on positions. 

Bund ASW profit taking - Commerzbank
In a strategy note published today Commerzbank recommends reducing exposure on Bund ASW tighteners. It writes:

• “Before the ECB sources, ASW-spreads were stealing the show with 10y Bund swap spreads hitting our 55bp target (initiated at +94bp on 19 Oct). The ongoing cheapening of the Bund scarcity premium is key but it does not constitute the only factor, as the market's ever stronger terminal rate conviction as captured by plummeting implied vols (and realized vols of ECB-dated forwards) keeps on pushing the tightening move.

  
  

• “Our models have become very balanced, and although the case for more tightening remains compelling, risk/reward has shifted given risks of lower net supply on cheaper gas bill and higher collateral demand on 0% cap.

  
  

• “So in sum, we can easily go to 45bp in 10y spreads judging by our models and considering the very short-lived recovery of 30y spreads over recent weeks. That being said, the tightening move will be more gradual from here and - what's more - no longer in a straight line. Thus, we expect more tightening, but recommend taking profit / reducing tightening exposure.”

New issues