EUR Swaps: Scaling into shorts after Bund spike

Bond chart 30 Jan 2023
Euro fixed income is trading weaker after a spike earlier in the session.

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  • Scaling into shorts after Bund spike
  • Caution on ASW tighteners - JP Morgan
  • New issues

    Scaling into shorts after Bund spike
    Euro fixed income is trading weaker despite spiking earlier in the session following lower-than-consensus inflation prints from German Laender and Spain.

    “Some were quick to use the move (higher) to scale into shorts,” reported one trader. Earlier, the 10y Bund future jumped around a point and peaked at 136.77 (+0.90) but has since been quick to drop lower and was last trading around 135.37 (-0.50).

    One dealer was not surprised to see euro fixed income trading lower despite flows from quarter/month-end possibly lending support to the market. “Credit spreads continue to tighten and equities are on a decent run,” he said, highlighting the risk-on backdrop. The Euro Stoxx last up 1.25% and the Euro Stoxx Banks Index up 2.2%.

    Elsewhere, Bund ASWs continue to tighten despite the new issue pipeline running thinner than previous sessions. “The thinking is they are too wide given improving risk. Some funds have sold the Schatz spread versus other parts of the curve.”

    Last Bund ASW prices vs 6mE were Schatz at 73.9bps (-1.2bp), Bobl at 71.5bps (-0.9bp), Bund at 70.1bps (-1.2bp) and Buxl at 32.7bps (unch).

    The short-end of the curve is also under pressure with red Euribors trading up to 15bps lower. Meanwhile, the 2s/10s segment of the swap curve has seen a sharp flattening with 2s/5s at -33.5bps (-3bps) and 5s/10s at -8.25bps (-4bps).


    Caution on ASW tighteners - JP Morgan
    In its latest rates weekly JP Morgan finds the Schatz ASW wide but cautions against outright short positions given recent volatility. The bank writes:

    • “The historical volatility of short end swap spreads over the past two weeks increased even further outpacing the peak during the COVID period and the one seen during the Lehman crisis in September 2008, with similar dynamic further out the curve. Also, the intra-day volatility in swap spreads quite often outpaces the close-to-close changes.

    • “With unprecedented volatility in outright duration and a strong negative directionality that is likely to hold, we find the risk/reward of outright swap spread positioning quite poor and recommend investors to keep outright swap spread exposure light, favouring swap spread curve trades or convex proxies.

    • "The Schatz OIS swap spread is trading about 10bp too wide in our long-term fair value model where we include short end rates volatility as explanatory variable. The strong directionality of swap spreads to yield levels and the limited overall retracement of yields since the lows seen at the peak of the banking crisis leave Schatz OIS swap spreads only few bps narrower than the YTD widest levels. We stay neutral on Schatz swap spread despite rich valuations but continue to favour long in Jun23 Schatz call spread as convex proxy to wideners as FTQ hedge.”


    New issues

  • Rentenbank is tapping €500m (max) 3.25% Sep 2030 around swaps -9bps through Barclays, BayernLB, Commerzbank and Danske (B&D).

  • Development Bank of Japan plans to sell EUR 5y after investor calls on 30 March through Daiwa, GS, MS and Nomura.

  • Korea Housing Finance Corp is pricing EUR 4y Social Covered around swaps +55bps through BNPP, Citi, HSBC, ING and Standard Chartered (B&D).

  • IHO Verwaltungs plans to tap €200m 8.75% 2028 SLB through DB (B&D), BNPP, BofA and Citi.

  • HIME is pricing €300m (max) 4y SLB around swaps +175bps through BNPP, HSBC (B&D) and MS.

  • Schneider Electric is pricing EUR 2y at swaps +30bps through BofA, CA (B&D), DB, Natixis and Santander.