Still nervous about headlines
European banking shares have been under pressure today after UBS bought Credit Suisse over the weekend in a deal that valued Credit Suisse’s €17bn AT1 bond portfolio at zero, see also EU authorities express support for AT1s.
The 10y Bund future surged up to 2.1 points and the 10y yield hit a low around 1.92% (-18bps) earlier in the session. The market has since pared gains with the Bund future last trading near unchanged. In the short-end, Euribors rallied up to +20bps and have since come back to +10bps.
“With no further bad headlines the market has recovered a bit. But some are still asking who’s the next target,” said one euro swapper. “Any headlines about vulnerabilities at other banks will make normalisation of market conditions harder.”
With the market still in risk aversion mode, new issuance remains absent. “Hopefully in the next session or so a few deals will start to price and that should help with liquidity (in the swap market),” felt one trader.
Meanwhile, Bund asset swap spreads remain wider across much of the curve, led by the front-end. Last prices vs 6mE were Schatz at 90.0bps (+1.4bp), Bobl at 86.9bps (+0.3bp), Bund at 79.9bps (+1.1bp) and Buxl at 36.1bps (-0.5bp).
In swaps, the curve is steeper with better paying reported across the belly and 10y sector, "ALM have been payers" a trader said. Last prices were 2s/5s at -23bps (+3bps), 5s/10s at -4bps (2.25bp) and 10s/30s at -54bps (+1bp)
In basis, IMM FRA/OIS is wider with the front contract last +2bp at 13.8bps although it remains a couple of bps below last week’s highs.
ASW tightening - NatWest
In weekly rates research NatWest expects paying pressure in swaps, but overall still expects asset swap spreads to tighten. The bank writes:
- "Paying pressure in swaps is a natural reaction to this round of stress. A theme last year was asset swap paying by banks to adapt their balance sheets to a higher rates world.
- “The urgency to continue to do that has probably increased somewhat, but it is probably still also level-dependent: at lower rates reducing duration will be substantially more attractive to all actors, banks included.
- “We expect asset swap spreads to continue tighten as sentiment is calmed and rates rise, but we have raised our forecasts for asset swap levels over the year. We now see bobl and buxl spreads falling to 55bp this year.”