Fading the rally and ASW widening; EU supply eyed
More hawkish talk from ECB President Lagarde kept the pressure on Bunds today, wiping a point off the Bund future and pushing the 10y yield up to 2.14% (+7.5bp). Speaking in Davos, Lagarde said the ECB must “stay the course” and warned the battle against inflation persists.
“The hawks are getting their point across. They realise that although gas prices have fallen wage growth is still a threat to inflation,” remarked one trader. In the short-end, Euribors have taken back the mid-week gains after losing another 7bps today. “Some were quick to fade (the rally),” reported a dealer.
Elsewhere, Bund asset swap spreads are 0.5bp to 1bp tighter today across the 5y to 30y sector. Note there has also been talk that fast money have been quick to re-enter shorts and fade recent Bund ASW widening.
Ahead, traders are also eyeing the European Union syndication next week with analysts expecting in the region of €8bn supply. In a strategy note today, Commerzbank suggests the EU could target the longer-end of the curve. It writes:
- "So far, the bulk of new issuance was in shorter to intermediate maturities, but this is set to change with the first EU syndications looming next week. The EU and related issuer curves have largely resisted the curve inversion (the highest EU yield is in the 20y sector and ultra-long yields have actually increased over the last month when 10y yields were falling).Yet this could have knock-on effects into other curves and it remains to be seen whether a pickup of 15bp is enough to extend duration from, say, 5y to 20y while the10s/30s EU curve is also inverted.”
Hold Bund ASW shorts - Barclays
In its latest weekly research Barclays holds its short Bund ASW vs €STR position, entered at 55bps vs current 35bps. The bank explains:
- “We are holding onto our shorts in Bund ASW vs €STR. German ASWs have lacked consistent direction since the start of the year, but from here we think the path of least resistance should be a renewed grind tighter.
- “Close to half of Q1’s syndicated EGB supply has already been placed, by our estimates; as such, we think a sizeable portion of this quarter’s syndication-related paying flows in swaps (ie, investors buying at syndications on ASW) are likely already behind us.
- "Looking ahead, the bulk of 2023’s heavy net supply burden still needs to be taken down, while the euro area liquidity surplus is set to decline on the back of commencement of ECB QT in March and upcoming TLTRO repayments.
- "Moreover, we think the balance of flows in swaps is likely to gradually shift over time away from paying and towards receiving, as focus shifts over time away from inflation risks and towards the growth outlook. Given these considerations, we view risks as skewed towards further Bund ASW tightening going forwards.”