EUR Swaps: Big supply arrives; 3s6s basis bid

Big supply arrives; 3s6s basis bid
The Bund has reversed yesterday afternoon’s rally and was last down around 85 ticks while the risk backdrop has seen stocks rally and the Euro Stoxx last up by 0.8%. “It seems like the impact of supply is kicking in today,” said one trader.

Among the heavy slate of sovereign supply hitting the market during this shortened week, Italy is today pricing €10bn long 8y Green at BTPs +8bps through BBVA, BNPP (B&D), BofA, CA and MPS. The latest order book size is reported to be above €54bn.

“The Italian deal is on the slightly lower side in terms of size,” said one dealer, “The Cyprus deal is proving to be a bit more popular,” he added as it prices €1bn 10y Sustainable at swaps +125bps through Barclays, HSBC, JPM, MS (B&D) and SocGen.

Elsewhere, new issuance has picked up with several banks active including DBJ and BNP Paribas. Bund asset swap spreads are tighter across the curve with last prices Schatz at 75.5bps (-2.0bp), Bobl at 72.3bps (-1.1bp), Bund at 69.1bps (-1.3bp) and Buxl at 33.1bps (unch).

In basis, 3s6s basis is better bid. “There are a few prices being made in forward basis,” a trader reported. Meanwhile 5y 3s6s basis was last +0.2bp at 5.55bps having been marked around 5bps-mid during most of yesterday’s session.

In euro swaps, one area of interest recently has been across the 2s/5s/10s swap fly amid better paying interest from end users while hedge funds have reportedly been playing the range. Today it was marked around -28bps having peaked as high as -14bps on the screens in March. 

Short Schatz OIS bias - JP Morgan
Strategists at JP Morgan hold a bias for short Schatz OIS spread but are cautious about shorts given ongoing volatility. They write:

• “At the short end of the curve, we continue to find Schatz OIS swap spread expensive vs. fundamental drivers such as funding rates, intra-EMU spreads and short end volatility. The level of the residual is only marginally less than one week ago as the sharp narrowing over the week (around 5bp) was less than implied by the sharp decline in short-dated volatility and by the broad narrowing in intra-EMU spreads.

  
  

• “Despite valuations remaining on the expensive side, we continue to hold a neutral outlook on Schatz OIS swap spread, as we believe that in current environment it will continue to hold a risk off premium and will unlikely revert back to levels implied by our long-term fair value model. Additionally, we believe that with limited further narrowing in funding rates, we have a bias to hold a widening bias when Schatz OIS swap spread (vs. €STR) declines below 50bp, which we think would be better expressed via long in Jun23 Schatz call spread as convex proxy to widener.”

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