EUR Swaps: Risk off, ASW out after SVB rattles markets; Traders unsure

Risk-off after SVB rattles market
Risk-off has been the theme after yesterday’s slump in Silicon Valley Bank (SVB) triggered fears of a wider problem for global banks - even those without a VC customer base.

The Euro Stoxx Banks Index today lost up to -5.2% just after the open although has since recovered to -3.5%. In euro fixed income, the Bund rallied over 2 points but later eased back to +1.25 points while the 10y yield has declined around -11.5bps to 2.525%. USTs are bull-steepening and dollar swap spreads are sharply tighter with SVB planning to receive against its (over-long) bond assets.

“The simple truth is that no-one knows how bad the SVB story could develop: it could end up being minimal or it could get bigger. So that means most people are trading risk-off,” said one euro trader. He conceded that the impact on fixed income is not clear cut, “On the one hand, offloading Treasuries (by SVB) should not be a positive story (for government bonds) but there are other elements, such as will it make central banks re-consider the speed of rate hikes,” he pointed out.

Meanwhile the risk-off momentum is being reflected in Bund ASWs as they widen across the curve. Amid choppy price action, levels vs €STR were Schatz at 43.4bps (+2.6bps), Bobl at 35.6bps (+0.5bp), Bund at 36.3bps (+1.5bp) and Buxl at 17.3bps (+1.0bp). In basis, IMM FRA/OIS has widened with the front contract +4.4bps at -3.9bps and the second contract +5.8bps at 8.4bps. 

In the near-term, US payrolls will be the immediate cue for the market with Bloomberg consensus at +225k compared to +517k the previous month.

Euribor mystery - SocGen
In its latest rates weekly strategists at Societe Generale argue that spot 3m/€STR remains too low given excess liquidity. The bank highlights the uniqueness of the 3m maturity. It writes:

• “Two possible reasons for such a low spot basis: 1) the usual lag between Euribor fixings and OIS swap rates, which adjust faster to higher ECB rate expectations, and 2) strong investor appetite for money market products, thereby driving down rates on short-term paper or deposits compared to ESTR swaps.

  
  

• “Both (of the above) reasons link the decline in the Bor/ESTR basis to higher ECB rates, but there may be another reason… Banks are not keen to borrow money over 3m from financial counterparties, so this segment is seeing relatively strong borrowing from non-financial corporates. Regulators decided to categorise short-maturity cash borrowed from financial counterparties as potentially “volatile” and made it costly from the standpoint of the liquidity coverage ratio (LCR). As a result, the bulk of banks’ borrowing over 3m is done with non-financial corporates (NFCs), while borrowing over 6m or 12m is more broad-based, with strong appetite recently from asset managers (who try to get some degree of credit spread vs ESTR).

  
  

• “Transactions with non-financial corporates are not eligible when computing Level 1 contributions to Euribor fixings, generating a negative impact on 3m fixings. As a result, 3m fixings are based on transactions that represent a small portion of the market and for which banks do not have much appetite. Hence, excluding NFCs from Euribor transactions implicitly has a negative level impact on Euribor fixings…

  
  

• “Flow data seem to support the story, highlighting the particularity of the 3m maturity. Unfortunately, the flow data do not cover recent weeks, except the CP market data from Banque de France. Still, the ECB’s MMSR data on wholesale unsecured borrowing by banks, including operations with NFCs, indicate robust activity in the 3m segment since late last year, albeit declining during the last maintenance period. On the other hand, EMMI data on Euribor transactions, excluding NFCs, show increasing volumes in the 6m and 12m maturities but decreasing volumes in 3m and 1m. Admittedly, we cannot precisely compare the two series given different panels and time frames. The EMMI transparency report also shows that Level 1 contributions (i.e. eligible transactions in underlying interests) have increased for the 6m and 12m maturities (with 12M Level 1 at is record high of 19%) but decreased in 3m.”