EUR Swaps: Bearish note; Euribor puzzle

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The Bund took a hit in the afternoon session after US data. Strategists debate why Euribor fixings have failed to rise with other rates.

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  • Ending on a bearish note
  • Euribor puzzle; New benchmark? - Commerzbank
  • New issues

    Ending on a bearish note
    Stronger-than-consensus US PCE data hit the Bund in the afternoon session, leaving the 10y future last 45 ticks lower while the 10y yield is marked +6bps at 2.54% and just a couple of bps away from recent highs.

    "We're finishing on a bearish note and overall its been a pretty bearish week even though the market has been fighting it a bit," felt one trader. "You only have to look at how everyone jumped on the dovish Villeroy comments earlier this week," he added. 

    Today the euro swap curve has flattened, "The back-end steepened up a bit earlier in the week going into the German 30y sale but now we've come back. There are a few out there who still like flatteners."  Last prices were 2s/5s at -27.5bps (-1bp), 5s/10s at -13.75bps (-2bps) and 10s/30s at -52.75bps (-0.25bp).

    Elsewhere, Bund asset swap spreads are mixed with last prices Schatz at 69.9bps (+1.9bp), Bobl at 67.6bps (+0.4bp), Bund at 63.7bps (+0.1bp) and Buxl at 33.7bps (+1.7bp). 

    In basis, the front-end of the IMM FRA/OIS curve has stabilised after facing significant tightening pressure earlier in the week. Last prices were Mar23 +0.7bp at -9.3bp-mid and Jun23 +0.4bp at 1.0bps-mid.


    Euribor puzzle; New benchmark? - Commerzbank
    Strategists at Commerzbank examine why Euribor fixings have failed to rise with other rates and led to tighter Euribor/€STR spreads.

    "Since last summer we reckon that a level-effect is the main reason for the trend lower in Euribor/€STR spreads as wholesale deposits are probably also not immune to the restrained pass-through in interest rates on savings, which is observable to a much larger extent at the retail level when rates rise.

    “The peculiar pattern in 1m Euribor/€STR spreads seems to corroborate this view. Even though it was clear in the run-up to every ECB meeting since July that rates would be higher during the week after that meeting, it appears that banks did not adjust the level on 1m deposits until after the rate hike was announced…”

    The bank discusses whether calls could intensify for Euribor to be replaced as a benchmark:

    “Discussions are resurfacing that Euribor should get replaced with a more robust risk-free interest rate benchmark (as has been the case in all other major currency areas)… Should the distortions persist with Euribor fixings remaining noticably below risk-free rates, the ECB would have stronger arguments for making more radical changes to its operational framework… (e.g.) non-bank financial institutions access to ECB deposits, directly via Fed-style reverse repos or indirectly via the issuance of ECB bills, could then become a hot topic with broader implications among others for Bund swap spreads…

    In conclusion, the bank reckons spreads should normalise but suggests keeping on eye on developments:

    “Most considerations point to a normalisation of Euribor spreads. The extremely negative levels should disappear when the ECB is done hiking interest rates and as excess liquidity subsides. This is also what the market is expecting with positive 3m Euribor/€STR spreads already discounted in forwards for mid-June…

    “The jury is still out on whether the limited pass-through is due to a timing-effect or part of a more persistent structural change, potentially also in light of expected regulatory adjustments. The development thus warrants close monitoring in view of the important revisions the ECB is considering for its operational framework for steering short-term interest rates.”


    New issues

  • AstraZeneca is pricing €750m 4y at swaps +25bps and €750m 9y at swaps +60bps. Leads are BofA, HSBC (B&D), Mizuho and Santander.