Big issuance flows
Euro new issuance has picked up pace following a pause during last week’s central bank meetings, driving much of the action across the swap curve today. “There’s been less focus on central bank policy and a big focus on flow,” reported one euro trader. “Some are using that (issuance flow) to take off positions they had on,” he added. For instance, there were reports some accounts were taking profit on carry trades such as steepeners and the flies have continued to cheapen today, although less than yesterday.
Among the issuers working on new deals, KfW is pricing €3bn 10y Green at swaps -4bps through Barclays, CA, DZ and TD. The latest order book was reported to be above €34bn including lead interest. As for the impact of the KfW deal, one trader suggested it could be having an impact on Bund ASWs, “From the flows we have seen it could be a driver and prevented the spread widening as much as it might have done (without the KfW deal),” reckoned one source away from the leads.
Last Bund ASW prices were Schatz at 73.2bps (+2.2bp), Bobl at 65.6bps (+0.3bp), Bund at 61.3bps (-0.3bp) and Buxl at 27.2bps (-0.1bp).
Across the curve, the 5y sector is proving popular with EIB today announcing plans for EUR 5y Climate Awareness EARNs (while also pricing $5bn 10y Climate Awareness bonds). Several non-euro issuers are also active in 5y including AIIB and JBIC.
Elsewhere, sovereign supply has seen a revival with France pricing €5bn 30y at OATs +9bps through BNPP (B&D), Citi, CA, HSBC and SocGen. The latest order book size was reported to be above €47bn including lead interest. The French supply has failed to steepen the long end of the euro swap curve with 10s/30s last -2.25bps at -51bps.
In the background, global fixed income remains in retreat for a third session with the Bund future last down by 50 ticks and the 10y yield marked +2.5bps at 2.32%.
Impact of ECB QT - strategists
In latest research strategists discuss the ECB’s plans for quantitative tightening (QT). To recap, the ECB announced it will reduce its APP portfolio by an average of €15bn per month until the end of June 2023, after which the pace will be re-assesed.
Citi: “The ECB’s QT details point to €10bn/month of roll-off in EGBs over March to June with most headwinds for German, Finnish and Irish bonds while the smallest impact would be for Dutch and Portuguese bonds thanks to no redemptions over this period. The QT modalities held no surprises for SSAs. However, the cessation of primary covered bond purchases in March may result in increased issuance in February and higher pricing uncertainty which together will add further widening pressure on swap spreads. The one area where we did not get confirmation was at what pace QT will continue in H2 23. However, this was expected at this juncture and we continue to believe that the ECB will move to full passive QT in H2 23.”
Commerzbank: “The stop of primary market purchases in the private sector programmes (with the exception of green corporate bonds) could add to the front-loading in covered bond issuance, keeping spreads under pressure for now. Longer-term, a stronger weight on secondary market purchases should underpin post-issuance spread performance of new deals.”
SocGen: “ According to our calculations the ECB could decide not to reinvest around €11-14bn of supranational bonds. This is relatively small compared to the c.€110bn of net supply we expect from spurs this year (mostly coming from EU net supply).”
JP Morgan "We still believe the ECB will most likely stop APP reinvestments from July onwards. The technical modalities announced today confirmed our view that QT will be purely a passive roll-off, which would lead to temporary deviation in the PSPP capital key in the short term."