EUR Swaps: Catching up with USTs; Issuance pipeline

Catching up with UST
The Bund is down over a point and the 10y yield has gained 11bps to 2.29% as the market catches up with Friday’s US NFP reaction. 

Amid a shortened holiday week, a few euro new issue mandates have been hitting the screen with Sydney Airport meeting investors next week for the planned sale of EUR 10y. In the meantime, among the issuers pricing deals today is CCDJ €750m 5y covered bonds.

In terms of flows, one market participant said it had been a muted start to the week. He noted Bund swap spreads remain correlated with price action in the Bund future, tightening by 1bp to 1.5bp during today’s selloff. Last prices were Schatz at 74.9bps (-1.6bp), Bobl at 72.8bps (-1.2bp), Bund at 69.5bps (-1.5bp) and Buxl at 33.5bps (-1.2bp).

In basis, 5y 3s6s is being marked slightly tighter despite the pipeline of new issuance due to arrive in the next week or so and was last -0.15bp at 5.1bps-mid. Further out, 10y 3s6s has widened a touch and was last +0.1bp at 0.95bps-mid.

In terms of sovereign supply, the pace is expected to slow following the passing of last week’s €10bn BTP syndication.

Instead, one market participant reckoned the focus this week is more likely to be on data, beginning with tomorrow’s US CPI print. Meanwhile, Eurozone data is set to include the final German, French and Spanish inflation prints later this week. 

Tighter asset swaps - NatWest
In its latest weekly rates report NatWest expects asset swap spreads to tighten and sees volatility as the key driver. It writes:

• “Asset swaps ended the week widening due to risk caution into the long weekend and because spreads rightly tend to widen as rates fall (rate locking, higher vol) in the current market. We have updated some of our long-term models. The unsurprising conclusion aligns with our view that spreads should tend to fall (but to higher levels than we thought likely earlier this year).

  
  

• “Our baseline, shown, has spreads declining to around 50bp at the end of the year. Policy uncertainty is the single most important driver and should continue to fall. Last year this was driven by inflation, war and gas prices.

  
  

• “But the model also emphasises how dependent this view is on lower volatility. A fall in 3m10y rates vol from around 115bp to around 80bp would shave off close to 10bp in the fair value 10y asset swap. Higher rates (or more specifically a steeper curve), which would slow down rates paying by rate lockers and ALM carry optimization.

  
  

• “A steepening in 2s10s from -35bp to flat would only add back around 3bp. In this market, we expect that bullish-steepening might begin by widening spreads, however, as lower rates initially bring ALM paying.”

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