EUR Swaps: Post-data fade flattens 2s/10s; Terminal rate too low

Line chart 25 Mar 2021
US data had only a fleeting impact on the euro curve with front end gains reversed into the close. Meanwhile banks doubt the level of terminal rates.

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  • Post-data fade flattens 2s/10s

  • Terminal rate priced too low: Banks  

  • New issues


    Post-data fade flattens 2s/10s

    Softer-than-expected US data failed to have a lasting impact today although the initial claims headline did cause the Bund to spike to test of 138 for the first time since the SVB-CS March Madness. However, with NFP data to come on Friday, and with Fed hawk Bullard on the wires, the Bund swiftly drifted back down to 137.32, just 4 ticks higher on the day.     


    Shorter on the curve, EURIBORs slid into negative territory led by Sep23, which lost 6 ticks while the swap curve bear-flattened to -41.8bps (-0.7) in 2s/10s and -6.2bps (-0.2) in 5s/10s. At the long end, the market digested €2.1bn in OAT-43 and €2.3bn in OAT-54 at today’s pre-holiday French auctions (plus €6.7bn in OAT-33) and the curve edged up to -40.7bps (+1.1) in 10s/30s and -36.5bps (+0.2) in 30s/50s.       


    IG issuers pressed the pause button for the long weekend and in swap spreads, after a short-lived widening from the open that lasted until the release of the US data, the Schatz ASW headed for the close around 77.6bps (+1.5), the Bobl widened to 74.1bps (+0.4) and the Bund rose to 70.9bps (+0.6). 3s6s also reflected the lack of deals with 10y offered down to 0.9bps (-0.3) and 5y to 5.3bps (-0.3).


    Finally, vol resumed its decline after yesterday’s US-driven pop with 1m10y down around 6.3nvol, 3m10y 3.6nvol lower and 1y1y softer by 3.3nvol.      


    Terminal rate priced too low: Banks  

    ECB meeting €STR forwards edged 2-5bps higher today to take the peak of the curve to 3.42% for Sep23 versus today's 2.90% fix. Still, the Sep23 ECB forward remains 7bps lower than week ago and many strategists’ still see upside risks to the level of terminal rates currently priced into the curve. For example, analysts at SocGen favour the belly of the curve in their pre-Easter research while the team at Barclays also sees market pricing as too low:  


  • SocGen: ”Belly should still outperform the wings…We saw a massive re-steepening in the US curve as markets priced the end of Fed rate hikes. Unsurprisingly, the EUR curve followed suit, but this was a premature move, with the ECB still to  deliver a decent amount of  rate hikes.


    “We believe a push higher in terminal rates, coupled with rising concerns over the global economy, should drive a further re-flattening of the front end of the EUR curve. Any expectations of cuts should be pushed back to late 2024. We  stick with 2s/5s flatteners (we target -50bp) to continue to receive the belly of 2s/5s/10s and 2s/10s/30s flies. These flies tend to perform well past the last rate hike in the cycle, and will, in our view, require rate cuts before reversing course.”


  • Barclays: “Market pricing points towards an ECB terminal rate in the region of 3.5% (having bottomed around 3.2% in mid-March). We view this pricing as a fairly conservative in the context of recent euro area dataflow, with core inflation showing no sign of peaking yet. For the ECB to meaningfully undershoot the current pricing, in our view there would likely need to be a sudden re-escalation of financial sector stresses.


    “Not only has core inflation continued to push higher as mentioned above, but on a forward-looking basis we expect it to remain stubbornly high throughout the summer, and remain well above 2% at year-end. An ECB overshoot of current terminal rate pricing would be especially likely if the Fed refrains from cutting rates throughout the summer, as expected by our US economists.”


    New issues

    • EU has asked its primary dealers for advice on the €4bn bond auction scheduled for April 17.


    • World Bank yesterday priced a €2bn 15y 3.1% Sustainability bond at swaps +25bps. Leads are BNPP, CA (B&D), DZ and NatWest.  Books above €2bn.


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


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


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