EUR Swaps: Risk sentiment improving; Pulled by UK and US

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Risk sentiment in the euro area continues to improve. At the same time, price action in the UK and US plays a role.

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  • Risk sentiment improving
  • Fewer ECB hikes - BNP Paribas

    Risk sentiment improving
    Risk sentiment in the euro area continues to improve, “The EU authorities were quick to argue the Swiss made a mistake when wiping out the AT1 debt,” remarked one trader, referring to EU comments made earlier this week. Among them, Andrea Enria, Chair of the ECB's Supervisory Board, stressed the robustness of euro institutions. 

    In the market, the 10y Bund yield has gained another 9bps to 2.38% having fallen below 2% at the start of this week, meanwhile the Euro Stoxx Banks Index continues to recover and was last up 1.3%.

    Aside from risk-on sentiment, sources say price action in other markets has also been having an impact in euro fixed income. “We are being pulled by other areas today,” said one euro trader, referring to a sharp selloff in SONIA futures following higher-than-consensus UK inflation.

    Earlier, UK CPI printed at 10.4%yoy vs 9.9% survey, driven by higher food prices and up from 10.1% the previous month. SONIA futures were down as much as 40bps earlier while Euribors have dropped up to 22bps.

    Bund asset swap spreads are mostly tighter in-line with the Bund sell-off and last prices vs 6mE were Schatz at 76.0bps (+0.4bp), Bobl at 74.5bps (-1.7bp), Bund at 71.2bps (-1.1bp) and Buxl at 31.2bps (-0.5bp).

    Ahead, the next cue for the market is seen as coming from the FOMC with the market expecting a 25bp rate hike. “Things have changed a lot since Powell spoke a couple of week’s ago. It is still unclear how much the fallout from SVB will impact the economy,” one trader said.

    Elsewhere, traders are also eyeing the possible impact on swaps from news that UBS is offering to buy back €2.75bn of 5y and 9y bonds that were issued before it agreed to take over Credit Suisse. Sources were unable to confirm any swap activity and/or rate locking that could be affected by the .

    Fewer ECB hikes - BNP Paribas
    In a strategy note BNP Paribas argues that tighter financial conditions are likely to lead to fewer ECB rate hikes. The bank now expects terminal rates to peak at 3.50%, a reduction of 50bps from its previous base case. It writes:

    • “Although our base case still projects further rate hikes by the ECB, recent market developments suggest less cumulative tightening that we previously though. Our new central case sees GDP growth of 0.6% in 2023 and 0.5% in 2024, down from our previous forecasts of 0.7% and 0.8% respectively. Inflation is also likely to be marginally lower than our previous forecasts.

    • ”With part of the central bank’s job done for it, and a more cautious reaction function likely from here, we shave 50bp off our terminal rate hike forecast to project 25bp hike in both May and June until the deposit rate reaches 3.50%. We see risks as elevated, but balanced around this new base case.”