EUR Swaps: HICP volatility but steady into weekend; Repo and ASWs

Steady into weekend
Euro core HICP printed in-line with consensus at 5.7%yoy, up from 5.6% the previous month. “If anything, there were some risks that it might print higher,” said one trader. Echoing this, euro 1y inflation swaps initially spiked 10bps higher after the French HICP data came in above-consensus this morning but then came back down to earth after taking a second look, and also following the Italian and euro prints. That left EUR 1y inflation 3bps lower on the day  at the time of writing while the rest of the HICP curve is back to unchanged, after the second data head fake this week (see Total Derivatives).

The 10y Bund future jumped higher after the data and was last trading near unchanged while the 10y yield was marked around 2.37%. Elsewhere, European stocks continue to post gains with the Euro Stoxx up by 0.4% while the Euro Stoxx Banks Index was near flat and about 6% firmer since the beginning of this week.

“As tends to happen on a Friday recently, people become a bit more cautious,” felt one trader, with swap spreads a touch wider at the front-end of the curve. The Schatz ASW vs 6mE was a last +0.4bp at 76.6bps but is closing the week around 10bps tighter as traders cite improved repo conditions, risk sentiment and swapped issuance.

Elsewhere, in its latest weekly rates research Societe Generale argues the Schatz spread will tighten amid repo market normalisation. However, it warns there is likely to be volatility. It writes:

• “German repo conditions, both the German repo margin (the gap between the German repo rate and ESTR) and German repo specialness, have normalised since late 2022. The gap between collateralised lending and uncollateralised lending could be explained by the relative scarcity of high-quality assets, amplified by the ECB’s large-scale bond purchase programme.

  
  

• “The decision by Germany’s Finanzagentur to add an extra €54bn to bonds on its own books and lend those bonds in the repo market seems to have reduced market tension, and the ECB’s decision to remove the end of April deadline on government deposits remuneration has eased markets’ fear of a massive decrease in government security lending in the repo markets. The pass-through rate has also significantly improved since December 2022, with both the February and March rate hikes almost completely passed through to repo rates.

  
  

• “Large net net supply of German papers should tighten ESTR-repo spread… the impact of the €32bn of QT in 2023 could be 1.6bp on the German SC repo rate and 7.1bp on German SC – GC repo. Considering the massive net supply of German paper and the large net net supply of around €150bn we expect from Germany in 2023, the impact could be larger than the estimate of €32bn this year. The redemption of TLTROs in the coming months could also continue to release a large amount of government bonds that are currently mobilised as collateral. All this could possibly end up turning the ESTR-repo spread negative by end-2023 and put the GC-SC gap near zero.

  
  

• “Expect some volatility… The tightening of the Schatz spread is unlikely to be in a straight line. The recent market turmoil triggered by SVB’s bankruptcy and the fall of Credit Suisse widened the Schatz spread from 35bp to 65bp at one point. As we pointed out in our last weekly (link), market concerns over medium-sized US banks and European financials could persist. While markets have quickly repriced the Schatz spread to around 45bp now and the narrowing of the ESTR-repo spread could push narrower, the tightening path will likely be volatile.”