EUR Swaps: Risk aversion into weekend

Sources report a sense of risk aversion going into the weekend. Rare new issuance this week included an Italian CMS-linked MTN.

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  • Risk aversion into weekend
  • EUR 10s/30s steepener - BNPP
  • New issues: Italy CMS

    Risk aversion into weekend
    A risk-off backdrop has seen the Bund future rebound around 75 ticks, the Euro Stoxx Banks Index slip about -1% while Credit Suisse shares are down by -10%.

    “I think the rally we saw yesterday (after the ECB rate decision) and today is people not buying into Lagarde’s stance that inflation and banking risks can be handled differently,” argued one trader. “There were a handful of dissenters to yesterday’s 50bp hike,” he pointed out.

    At the same time, he felt today’s flows also reflected some short-term covering into the weekend, “After the week we’ve had there is no way people are going to be running much risk," he noted.

    As a result Bund asset swap spreads have widened by 4-7bps, led by the front-end. Last prices vs 6mE were Schatz at 89.6bps (+7.0bp), Bobl at 84.5bps (+4.8bp), Bund at 78.1bps (+3.9bp) and Buxl at 36.9bps (+3.6bp). Still, 1m10y vol is down around 5 normal vols and 1y1y is about 2 lower.

    Anecdotally, recent swap flow has included better paying across 5y-10y sector from real money accounts. Today the swap curve was relatively steady compared to recent price action with 2s/5s at -27.25bps (+2.5bp), 5s/10s at -9.75bp (-0.5bp) and 10s/30s at 56.25bps (-0.75bp).


    EUR 10s/30s steepener - BNPP
    Strategists at BNP Paribas say they are cautiously bearish on yields and favour holding EUR 10s/30s steepeners. The bank writes:

    • "Previous episodes of acute stress suggest that Bund yields could drop even more on an intensification of fears, potentially breaking through 2% as FTQ flows accelerate and the market prices more rates cuts. However, with 5.6% core inflation in the eurozone, perceived 2% long-run neutral, and €STR not yet at 2.9%, we still see limited scope for EUR yields to rally from here, especially compared with other regions.

    • “Ultimately, where yields go from here will depend on sentiment about the banking sector. But we note that the market is already much more dovish than us, with May and June priced at just 10bp, thus limiting further any potential to rally. With that in mind, we remain short 30y Bund vs long 30y Gilt.

    • “As for the curve, it remains very directional, especially 2s/10s, as the front end – or expectations over central banks’ policy – leads the price action. We liked EUR 10s/30s steepeners even before the SVB fallout, and the increased likelihood of a shorter cycle makes 10s/30s steepeners look even more attractive to us.”


    New issues: Italy CMS

  • Italy this week issued a €250m CMS-linked MTN due Mar 2035. Coupon pays EUR 20y +140bps capped at 6% and floored at 3%. Led by Morgan Stanley.