Retreating but super cautious
The euro fixed income market is retreating after this week’s SVB-induced risk-off gains with the 10y Bund future last down just over one point and the 10y yield climbing by +10bps to 2.35%. The EuroStoxx has managed to edge up by +0.5%. Still, one trader said that banks and clients remain “super cautious” and with limited interest so far to fade recent moves.
After yesterday’s double-digit widening in Bund asset swap spreads, today has seen a marked retreat and around 5bps of tightening. Last prices were Schatz at 78.1bps (-6.5bps), Bobl at 72.7bps (-6.1bp), Bund at 67.8bps (-4.9bp) and Buxl at 31.7bps (-5.5bp). The 10y BTP-Bund spread is 6.5bps tighter around 185bps.
In the short-end, Euribors have retreated by up to -7bps and are trading around 30bps above Friday’s close (having been up as much as 60bps higher during yesterday’s session). Further out, the euro swap curve is mixed with 2s/5s steeper at -33bps (+6.25bps), 5s/10s flatter at -15bps (-1bp) and 10s/30s at -49.5bps (+0.5bp).
In terms of flows, one trader said activity had been focused on the short-end while the long-end had been out of focus, “When you get these big moves clients tend to focus on one area initially and the past couple of days that was certainly the front-end. Hedge funds had big stop-outs and there was serious pain,” he said.
In basis, the front IMM FRA/OIS contract is marked +2.6bp wider at 12.5bps but remains below yesterday’s intra-day highs when it got marked around +15bps-mid.
Ahead, traders are eyeing US CPI data with the Bloomberg consensus for 6.0%yoy vs 6.4% prior.
Unknown unknowns - Commerzbank
In its daily strategy note published today Commerzbank discusses the unknown unknowns facing central banks. It writes:
- “Central banks are facing a predicament at the moment: while still keen to stay on the path towards higher rates, the (unknown) second order of effects of the massive policy tightening since last year are now taking over. Regardless of the consensus that SVB's failure is unlikely to trigger a systemic crisis, markets and policy makers are already scrutinizing where the next blow could come from.
- “In contrast to inflation risks, such Knightian uncertainty is harder to deal with for central banks, at least in the very short term. More important for now, it reinforces market expectations that the days of aggressive hikes are numbered.
- “BTPs probably best sum up the "few hikes, no contagion" dynamic; yes, spreads vs. 10y Bunds are some 10bp wider, but 10y outright yields are 20bp lower than on Thursday as well as 45bp lower than in early March… the record turnover in the Schatz future highlights that trading liquidity is not evaporating as during past stress periods. Juicy Schatz yields - particularly compared to past flight-to-quality - are probably further boosting the hunt for short-dated Bunds.
- “Although this takes the edge out of the imminent ECB and Fed meetings, the jury remains out if the swift cuts forwards curves are discounting will materialize as the visibility gradually increases in absence of broad contagion. For now, however, the historic front-end re-pricing looks set to persist and even a higher US CPI seems insufficient to break the momentum. On the curve, the directional 10-30y steepening seems comparatively muted so far which probably reflects concerns that central banks will trade financial stability against inflation risks to some extent going forward.”