EUR Swaps: Calmer end to the week; US data eyed
Calm end to the week
A relatively calm end to the week has seen the Bund trade within a 50 tick range for much of the session and the 10y yield edge 5bps lower to 2.70% last.
“There’s been none of the drama from earlier this week,” reported one trader. As for flow, he noted that, “Things are still quite busy with some activity in the Bund roll.”
The short-end has bounced for a second session with red Euribors trading up to 5bps higher today. “There’s possibility been an overshoot from positioning and now some people have been fading it,” a trader said.
Bund asset swap spreads are tighter by 0.5bp to 1.75bps, led by the front-end of the curve. Last prices were Schatz at 64.7bps (-2.1bp), Bobl at 64.6bps (-1.4bp), Bund at 59.8bps (-0.9bp) and Buxl at 28.4bps (-0.4bp).
In the near-term, traders are also keeping an eye out for US ISM Services data at 16:00 CET, “We are expecting a slightly larger drop than the forecast,” said one trader at a European bank. The Bloomberg consensus is for a decline to 54.5 from 55.2.
Bund to peak 3% in 2Q23 - SocGen
In its latest rates weekly Societe Generale has revised its baseline target for the 10y Bund yield to 3% while also pushing back its expected peak to 2Q23 from 1Q23. The bank explains:
- “Based on the non-linear relationship with the terminal rate, the Bund 10y may struggle to move above 2.85%, except if swap spreads narrow well below our target of 55bp. So within this framework, an additional term premium increase of 20bp or so would be needed to drive the Bund 10y yield to 3%.
- “We think that this is likely given that our proxy for the EUR 10y term premium is still roughly 45bp below its peak of last October. The picture is similar for 10y real rates – some 35bp below the October peak.The ECB’s plans to step up QT after June should help drive the real term premium up.
- “Looking at the relationship between long rates and ER8, for the Bund 10y to hit 3% in 2Q23 would require ER8 at 3.60% or so by then, i.e. roughly 20bp above its current level. A different path of ECB rate hike pricing could make that happen. For instance, if the market prices the terminal rate at 4% but rate cuts only from 1Q25 at 25bp per quarter, the implied path for ER8 would be consistent with the 10y at 3% in 2Q23, 2.80% in 3Q23 and 2.55% in 4Q23…
- “The above scenarios could justify a Bund 10y yield target at 3% in spring, 2.75% or so in 3Q23 and 2.50% in late 2023. We will fine-tune our analysis and revise our baseline projections, accordingly, also taking into account other factors (swaps spreads, term premium as well as our view on US Treasuries).”
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