EUR Swaps: Another washout amid CS turmoil

Sad wfh trader 11 Oct 2021
A plunge of almost 30% in Credit Suisse shares put euro fixed income firmly back into risk-off mode today

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  • Another washout amid CS turmoil
  • ECB preview - NatWest
  • New issues

    Another washout amid CS turmoil
    Clients that were brave enough to fade the recent euro curve steepening have already been “washed out” amid another volatile session.

    A plunge of almost 30% in Credit Suisse shares put euro fixed income firmly back into risk-off mode today after its biggest shareholder Saudi National Bank ruled out further assistance. 

    The bank’s CDS jumped over 218bps and is now marked around +795bps compared to +350bps a week ago. Other European banking stocks have faced renewed pressure with the Euro Stoxx Banks Index declining more than 8%. There is a deafening silence from the Swiss National Bank so far (another SNB helped to cause the latest rout), but surely a collateralised liquidity facility to match the Fed's, but with easier collateral terms, will be required.  

    Amid the latest volatility and ahead of tomorrow’s ECB meeting white Euribors have surged up to +40bps and were still climbing at the time of writing. Further out, the 10y Bund yield has declined by -21bps to 2.20% to wipe out all of yesterday’s gains. 1m10y and 1m30y volatility are both around  20nvols higher again, while 1y1y is up 12nvol.

    “We weren’t necessarily seeing clients brave enough to take an outright punt on the Bund or Euribors. However, there had been some receiving interest across the curve and selling of asset swaps - they’ve already had another washout,” reported one euro swapper.

    Across the swap curve, the direction has been sharply steeper with 2s/5s at -26.5bps (+7.5bp), 5s/10s at -7.5bps (+8.5bps) and 10s/30s at -52bps (+0.5bp). Elsewhere, Bund asset swap spreads vs 6mE have exploded by 10-15bps.

    In basis, the tone has also been risk averse with front IMM FRA/OIS widening to 15.8bps (+3.3bp) and edging back towards recent highs while €STR-BOR is +4bps in 5y and first break 3m EUR/USD cross-currency is back down by 15bps.


    Inflation swaps are 5-12bps lower with 5y5y at 2.37%. 


    ECB preview - NatWest
    In a strategy note published yesterday NatWest expects the ECB to hike by 50bps at this week’s meeting, followed by data dependency on future decisions. It writes:

    • “Nothing material has changed in the euro area (yet). Risks to the US cycle have increased. Global demand and a stronger euro may develop as a stiffer headwind over time. Financial conditions may also deteriorate further for any given level of policy rates. But all this needs to be confirmed.

    • “The ECB is unlikely to see strong enough risks to take a smaller step than +50bp. But the case to emphasise that future policy decisions are fully data dependent, and to emphasise readiness to secure financial stability in the euro area is also strengthened. That means accepting that the next move may also be a rate cut.

    • “Without clear further financial contagion in the coming hours – which we don’t expect – we think the ECB will raise rates by 50bp, as widely anticipated. Raising rates by 25bp will surely be considered, in order to buy some kind of insurance in respect to a policy mistake ‘à la Trichet’ (i.e. a large rate hike, precipitously reversed), but we do not expect the option to carry the floor. An outright pause this week looks even less likely to us at this stage.”

    New issues

  • KfW is tapping €1bn 2.5% 2025 at swaps -41.3bps through HSBC.

  • Lower Saxony is tapping €500m 2.75% 2031 at swaps -2bps through Deka (B&D), JPM and NordLB.