Yields test new highs; Front-end stays pressured
Euro yields are testing new highs again today with the 10y Bund yield creeping up to 2.58% (+4bps) while the 10y future was last down 50 odd ticks.
One trader highlighted a few cues that could push the market lower this week, “We have the preliminary inflation data beginning with France tomorrow and then US data this week including manufacturing ISM.” At the same time, he noted that month-end flows could provide some support to the market, “The supply calendar doesn’t look as hectic either but that also leaves room for syndications,” he noted.
In the short-end Euribors has been under pressure marking a continuation of Friday’s move. Reds have dropped as much as 9bps today, adding up to a decline of 25bps over the past two sessions. “It’s felt like there have been some stop-outs,” said a dealer.
Elsewhere on the curve, the 2s/10s segment has been flattening with 2s/5s at -40.25bps (-0.25bp) and 5s/10s at -14.5bps (-1bp). Further out, 10s/30s is 2bps steeper at -51.5bps.
Bund asset swap spreads are mixed with the Schatz widening by +1.3bp at 70.0bps and the Bobl +0.8bp wider at 68.2bps. Further out, the Bund is unchanged at 63.9bps while the Buxl has tightened and was last marked -0.4bp at 32.2bps. “The Buxl spread has been looking a bit toppy and there has been interest to fade it,” one trader reported.
Euribor flattener - Deutsche Bank
Strategists at Deutsche Bank recommend ERM4/ERM5 flattener at -45bps with a target of -110bps and stop at -5bps. It writes:
- “The rationale is that Eurozone core inflation is around 5%, twice its previous peak of 2.5% since the creation of the euro. This has two implications. First, relative to the previous cycles, the timing of the rate cuts is likely to be delayed given that inflation is further away from target. Second, the money market curve should be more inverted than in recent cycles, if we assume that the ECB is credible in delivering on its inflation mandate.
- ”The market is currently pricing a little less than two cuts between June 24 and June 25. This compares with around three cuts priced in the US for the same period. If one were to assume that the Fed is around 6m ahead of the ECB, there are close to six cuts priced in the US between Dec 23 and Dec 24. Averaging it out would suggest a target of four to five rate cuts, I.e. -110bps for ERM4/ERM5. Equally, with an ECB which is intent to conclude its rate hike cycle by September, it is unlikely that the market will price hikes. Thus we set the stop at -5bps.”