French relief; Clients eye long rates
French inflation matched the Bloomberg consensus at 7.0%yoy and lent some support to the rates market after yesterday’s Spanish overshoot.
“There was probably a bit of relief… But then Germany’s postponement of its inflation data means tomorrow’s (euro composite) numbers carry more uncertainty and could see a big reaction,” suggested one trader.
In the meantime, the Bund future was last up 30 ticks while the 10y Bund yield was marked around 2.28% (-3.5bps).
Elsewhere, one trader reported paying interest in the longer-end of the curve as some clients look to position for higher rates. Today has seen 5s/10s up 1bp at -6bps and 10s/30s up 1.5bp at -52.5bps.
Elsewhere, Bund asset swap spreads are a touch tighter across the 5y to 30y sector while new issuance has slowed down sharply ahead of the Fed meeting tomorrow and ECB on Thursday.
In basis, 3s6s has tightened by 0.2bp to 0.4bp across the 5y to 30y sector of the curve. Note that yesterday saw decent widening amid reports of new issuance related activity. Elsewhere, IMM FRA/OIS has narrowed about 0.5bp and follows frustration at low EURIBOR prints, see here.
Repo and ASWs - Commerzbank
In a strategy note published today Commerzbank looks at repo levels and finds swap spreads are trading rich. However, it avoids ASW tighteners given the risks of the ECB reinstating its 0% cap. The bank writes:
- “The scarcity term premium is staging a comeback as ongoing cheapening of Bund spot repos is met by a tentative re-widening of swap spreads. The 0% cap seems key with the extension of the waiver no longer being perceived as a foregone conclusion by the market, which is underpinned by the major run-down of the DFA's cash balance as shown by the data.
- “At the same time, specialness is resuming the downtrend while implied vols also continue to decline. In sum, swap spreads are trading rich against our fair value model once more which underscores the impact of scarcity expectations. We refrain from renewing ASW-tightener though given the widening potential on ECB signals for a reinstatement of the 0% cap.”