EUR Swaps: US data drive Bund higher again; BofA on spreads

Chart numbers 14 Jun 2022
More weaker-than-expected US data rallied global fixed income again today, bull-steepening the euro curve. Ahead, banks look for tighter spreads.

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  • Softer US data drive more bull-steepening  

  •  Liquidity, supply and vol to weigh on spreads: BofA 

  • New issues


    Softer US data drive more bull-steepening  

    Softer than expected US data provided the spark for a global fixed income rally for the second afternoon in a row today after the (sometimes flaky) ADP jobs report printed at 145K versus the 210K consensus, echoing the message of yesterday’s JOLTS numbers, while the ISM Services index slipped to 51.2 versus a forecast 54.4.


    In contrast, German orders and French industrial production data earlier today were both above-forecast but after initially coming under pressure the Bund rose from 135.85 morning lows to test 137.48 shortly after the ISM data, more than a point higher on the day.


    Meanwhile cash yields were 6-10bps lower led by the front end with 2s/10s steeper at -31.7bps and 10s/30s up to 9.2bps. Indeed, the combination of weaker US data and less hawkish comments from Croatian central bank Governor Boris Vujcic (“the biggest part of the cycle of rate risks is behind us,” Vujcic stated today, before adding the caveat that further hikes could be expected if euro core inflation were to remain above 4%) helped to support EURIBORs with the futures 1-14 ticks firmer in the whites, and 10-15 ticks stronger in the reds.          


    In issuance, the pace of announcements slowed further ahead of the Easter break but the World Bank, CA Home Loan and Erste all came with swappable deals. Asset swap spreads tightened through the morning before rebounding with the rally to leave spreads (versus EURBOR) wider at 78.0bps (+1.8) for the Schatz, 74.0bps (+1.4) for the Bobl and 70.7bps (+1.2) for the Bund. 3s6s basis trod a similar path, better offered at first but then better bid with 5y at 5.7bps (+0.2) and 10y at 1.3bps (+0.1).      


    Liquidity, supply and vol to weigh on spreads: BofA  

    Ahead, euro swap spreads are still on "a tightening trend” according to strategists at BofA this week, driven by the combination of “liquidity normalisation and persistently high supply of EGBs.” BofA continues:


    “High targeted longer-term refinancing operations (TLTRO) repayments (especially at the June deadline) and the continuation (perhaps later acceleration) in Quantitative Tightening should put excess liquidity on a clearly downward path into 2024. The exact transition to a new rates / bank liquidity system by the ECB can add significant risks on the relative valuation between €STR and EUR repo rates, but this should be more relevant for 2024 than 2023.”


    “The point on supply is clearer - government funding needs will remain large(r) for the foreseeable future. A potential turn in the economic cycle from recovery to slowdown, coupled with increased military expenditures linked to the Russia-Ukraine conflict and the big To-Do list for the energy transition all mean that risks remain skewed on the upside for bond issuance in 2023 and the years to come.”


    “Finally, lower rates volatility can contribute to reduced demand for ‘safe’ collateral, supporting tighter swap spreads. Our baseline scenario where the Fed is about to reach its terminal rate is consistent with a lower (global) rates volatility environment.”


    New issues

    • World Bank today priced a €2bn 15y Sustainability bond at swaps +25bps. Leads are BNPP, CA (B&D), DZ and NatWest.  Books above €2bn.


    • Orange plans a €1bn perp NC7 Hybrid at 5.5%. Leads are BNPP, HSBC (B&D), BBVA, Citi, Mizuho, MUFG, Natixis and Santander.


    • CA Home Loan  today priced a €1.25bn 7.5y Covered bond at swaps +28bps. Leads are BayernLB, CA (B&D), ING, SEB and UniCredit.


    • BPCE plans a €1bn 3y at swaps +70bps. Lead is Natixis.


    • IFB Hamburg is preparing a €250m 10y at swaps +5bps. Lead are Deka, Helaba, LBBW (B&D), NordLB and HSBC.


    • Erste Group today priced a €1bn 4.5y Covered bond at swaps +20bps through Erste, Helaba, IMI, LBBW, Natixis and TD. Books above €1.5bn.