EUR Swaps: ASW resilience; EURIBOR drop adds to puzzle
Bund yield tests highs; ASW resilience
The 10y Bund yield is trading at the 2022 and multi-year highs around 2.55% while the Bund future has dropped 50 ticks.
In latest ECB speak, Executive Board member Schnabel said in an interview that the ECB is “still far away from claiming victory” on inflation and argued “we may have to act more forcefully”. Speaking this morning, one trader said, “The market is perhaps a bit weaker on the Schnabel comments, but it’s hard to see how much further it can go (selling off),” he reckoned.
Reflecting more generally on price action this week, one trader noted that Bund asset swap spreads had been robust as new issues were bought on asset swap. “The Schatz spread, where some have been short, has been quite resilient and that is also trickling up the curve and helping longer spreads stay supported,” he felt.
Last Bund ASW prices vs 6m were Schatz at 66.8bps (+1.6bp), Bobl at 63.4bps (+1.0bp), Bund at 58.5bps (+0.7bp) and Buxl at 26.2bps (+0.9bp).
In swaps, one trader said there was still a bid for paying longer-dated swaps. “We are flatter a bit today, but that is perhaps some people cutting back a bit at the end of this week,” he reckoned. Last prices were 2s/5s at -38.5bps (+0.25bp), 5s/10s at -12.25bps (-1.5bp) and 10s/30s at -52.75bps (-2bps).
In basis, BOR/OIS continued to narrow across the curve with 5y tighter by 0.3bp at 11.7bps and 10y tighter by 0.5bp at 14.4bps. To recap, some traders have suggested narrowing in BOR/OIS could be due to some accounts buying ASW vs €STR, see EUR Swaps: ASW buyer talk; BOR/OIS narrower.
Shorter in, a big 3.6bps drop in the 3m EURIBOR fix has pulled the simple spot 3mE/€STR spread back down to around -12bps, its lowest since January 5th (for more on this see SocGen below).
Finally, after a double-digit rise at the front of the euro inflation curve yesterday following an unexpected rally into and out of French supply (see Total Derivatives), swaps have reversed and are down 9bps in EUR 1y1y today following a a 4% drop in gas futures to below €50 for the first time since September 2021.
Receive forward 3m/€STR basis - SG
Strategists at Societe Generale recommend receiving forward 3m/€STR basis Sep IMM at 9bps and targeting 3bps. It writes:
- “The distance between forward and spot 3m/€STR basis is close to a record wide… This seems at odds with the near €600bn decline in excess liquidity since last November which should have been even stronger given close to €900bn in TLTRO redemptions… Is spot 3m/€STR basis too low or are forwards too high? Both, in our view. The spot 3m/ESTR basis seems too low given current excess liquidity, but forwards price an excessive widening. Put differently, forwards price an excessively fast decline in excess liquidity from 2H23.
- “We struggle to find convincing reasons to justify such a low 3M/€STR spot basis… A reason could be the usual lag between Euribor fixings and OIS swap rates that adjust faster to higher ECB rate expectations. Lower rather than higher Euribor fixings could also possibly be explained by strong investor appetite for money markets products. The most recent Banque de France data points to strong issuance of CP by banks…
- “Our in-house projections of the ECB balance sheet normalisation suggest the Sep IMM basis should trade around 6.5bp… market pricing implies too fast a decline in excess liquidity from 2H23. To be consistent with forwards pricing, euro area excess liquidity would have to fall to €2,700bn by September, meaning a close to €1,500bn decline from current levels, nearly €700bn more than what we expect…
- “Admittedly, trades like this have been popular for some time among fast money. This warrants some caution, in our view, and argues in favour of not being too greedy in terms of target profit.”