EUR Swaps: Supply and ASW flows; Receiving bias

Supply and ASW flows Receiving bias
The week in euro markets continues to see a revival of new issuance with KfW headlining today’s supply with the sale of €5bn long 7y.

Meanwhile, traders say Bund asset swap spreads have seen two-way flows, “It’s been a busy week with buyers on asset swap and also some new deals getting swapped,” said one. Among the recent candidates for ASW buying included yesterday’s EU’s €6bn long 11y via syndication. In spreads, last prices vs €STR were relatively steady with the Schatz at 38.5bps (+0.7bp), Bobl at 32.7bps (+0.7bp) and Bund at 33.7bps (+0.3bp).

In basis, sources suggest some of the firming in the longer-end of the 3s6s curve could be new issuance related with 10y earlier marked up by 0.2bp at 4.4bps and approaching yearly highs.

Over in swaps, the curve has flattened across the 2s/10s segment with 2s/5s at -50bps (-2bps) and 5s/10s at -21bps (-1.5bp). “Overall, the bias has been towards better receiving in recent sessions. We haven’t seen a rush for paying flows despite the hawkish tone coming out of Europe and the US,” said one trader. Further out, 10s/30s was a touch steeper at -56bps (+0.5bp). SDR (ie trades involving at least one US entity) euro swap volumes (link) are strongest in the 5y and 10y buckets.

In recent US data, ADP Employment earlier printed above consensus at 242k vs 200k. The Bund future was last up 44 ticks while the 10y yield has declined by -3.5bps to 2.655%.

Ahead, one trader felt the market could be stabilising, "All of the recent issuance has helped turnover and it feels like we are steadying a bit after the selloff into the end of last month."

Stay short Bund ASW - Barclays
In its rates weekly published the end of last week Barclays recommends staying short Bund ASW vs €STR. It writes:

• “The widening seen towards the end of February likely reflected the increasing focus being placed on the “higher-for-longer” theme across developed markets. In particular, we think renewed fears around policy rate tightening likely motivated some pickup in the pace of paying flows. Ultimately however, we do not think this is likely to be sustained over the medium term…

  
  

• “At this juncture the hiking cycle is already well progressed and market participants have already been taking action to hedge interest rate exposures for some time. As such, we think medium-term scope for a continuation of heavy paying flows has likely become relatively more limited. Moreover, at a more granular level, it should be noted that mortgage origination volumes in the euro area have been slowing sharply since mid-2022 as interest rates have climbed.

  
  

• “All else equal, we think this could point towards relatively limited medium-term scope for continuation of heavy mortgage-related paying flows in EUR swaps from here. At the same time, if and when focus eventually returns to growth risks, in the context of substantial policy tightening already completed in this cycle, we see potential for a pickup in the pace of receiving flows. Alongside a heavy medium-term net supply burden and ongoing ECB QT, we think this should encourage a medium-term drift tighter in EUR ASWs from current wide levels.”

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