EUR Swaps: EU deal supports ASWs; Powell eyed

EU deal supports ASWs; Powell eyed
A decline in the ECB’s survey of consumer inflation expectations bolstered rates and helped to push the 10y Bund yield down by 7bps to 2.68%. In the short-end, Euribors gained up to 5bps before easing back and were last trading up to 2.5bps higher.

For some traders today’s focus has been on supply as the EU prices €6bn long 11y with latest orders above €54bn through Commerzbank, GS, HSBC (B&D), MS and SocGen. “Spreads have been under pressure but the EU deal is providing a bit more support to the market,” said one trader away from the leads, suggesting the EU was counterbalancing swapped issuance flows from corporates and banks such as NatWest and Nationwide, as well as KfW's upcoming 7y.

Last Bund ASW prices vs 6mE were Schatz at 62.5bps (+3.9bp), Bobl at 60.5bps (+1.9bp), Bund at 59.2bps (+1.3bp) and Buxl at 26.7bps (-0.1bp).

In swaps, the 5y sector has outperformed and pushed 2s/5s flatter at -45.5bps (-4bps) while 5s/10s was steeper at -17.25bps (+1.25bp). Further out, 10s/30s is steeper at -55.25bps (+2bps). “Possibly some accounts have been reviewing carry trades,” one dealer suggested.

Ahead, euro traders are looking towards Powell’s testimony to the Senate Banking Panel later today. “The thinking is that Powell could be a bit hawkish and stress the importance of fighting higher inflation,” reckoned one trader at a European bank.

Euribor flattener - Citi
Strategists at Citi position for a stronger and shorter continuation of the tightening cycle and further inversion of the curve. It enters ERM3/ERM4 flattener at +24bps, targeting -20bps and stop at 46bps. The bank writes:

• “Considering the expected core inflation plateau does not close the door to re-acceleration of underlying inflation the likelihood that ECB is growing increasingly uncomfortable about the delayed normalisation of inflation we see increased chances of hawkish momentum building up within the GC.

  
  

• “In nominal space, the implication is a flatter OIS curve via a repricing of this cycle’s terminal rate higher, and more subsequent cuts thereafter. For the former, we see an asymmetric (positive) risk/reward in positioning for a 4% terminal outcome reached faster, with June and Aug23 ECB ESTR currently consistent with depo at only 3.69% and 3.86%, respectively.

  
  

• “While the market may well reprice lower on negative macro data, we do not see the GC “talking down” the curve, given this would effectively amount to an easing of monetary conditions. For liquidity considerations with respect to the trade as a whole, we prefer to deploy our view in Euribor futures and pick ERM3 as the short leg. We find picking the second lag tricky considering the amount of easing currently priced. Overall, the ERH4 contract looks attractive as its implied yield is trading positive to ERM3.”

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