EUR Swaps: Risk outlook steadies; Smooth 10y BTP launch

Italy flag 8 Jun 2020
The risk outlook has steadied and swap spreads are tighter. Sources report a smooth 10y BTP launch.

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  • Risk outlook steadies; Smooth 10y BTP launch
  • ECB to deliver 25bp hike - RBC
  • New issues

    Risk outlook steadies; Smooth 10y BTP launch
    A more stable risk outlook has seen US stock futures bounce, the Euro Stoxx gain +0.2% while the Bund future is trading around 40 ticks lower.

    In euros there was more big supply today as Italy earlier launched a new 10y BTP selling €5bn 4.35% 2033 bonds with an average yield of 4.42% and bid to cover at 1.32. “It came and went very smoothly,” said one market participant, “The new 10y had been trading at 10.2bp over the May33 and has been pretty stable on spread both before and after. Dealers got a nice outright concession into the auction and bounce afterwards, so probably everyone is quite happy,” he felt. Italy also tapped €2.5bn 2028 and €1.5bn FRN 2028 today. The 10y BTP future was last down about 25 ticks with the 10y BTP/Bund spread a touch wider.

    Elsewhere, swap spreads are tighter amid the Bund sell-off and steadying risk outlook, led by the longer-end of the curve. At the front-end, the Schatz ASW was last -0.3bp at 78.8bps but remains elevated and near recent highs. “We’re not seeing a great deal of interest to sell,” said one source, adding most accounts are still a bit wary.

    In basis, the recent big widening move in 3s6s has stalled with most of the curve today marked -0.1bp to -0.2bp today. The past few sessions saw paying interest in 3s6s forwards.

    Finally, the euro swap curve has steepened with 2s/5s at -39.75bp (+1.75bp), 5s/10s at -6.25bp (+1.5bp) and 10s/30s at -41.5bps (+0.75bp). “To be honest there’s not been a great deal happening… flows have been quite balanced,” reported one trader earlier.


    ECB to deliver 25bp hike - RBC
    In a strategy note published yesterday RBC previews the ECB meeting and expects a 25bp hike. It writes:

    • “We expect the ECB to deliver a 25bp rate hike at its meeting next week. Core inflation remains too elevated for the ECB to pause and there is no sign of easing in the tightness of the labour market. Recent data also points to more resilient near-term activity, although slowing credit growth casts uncertainty over the medium-term outlook.

    • “The ECB is likely to seek to maintain optionality and we do not expect it to give any explicit forward guidance for subsequent meetings. It may, however, indicate that the bias (absent a deterioration in the data) remains towards further tightening.

    • “We continue to expect that the ECB will deliver two further 25bp hikes after next week’s meeting for a terminal deposit rate of 3.75%. We think the ECB is likely to wait until the next meeting before announcing Q3’s pace of APP run-off as it monitors the effects of the upcoming June TLTRO redemption. Ultimately, we expect the ECB to opt for a cap of €20-25bn on monthly APP redemptions, up from the current €15bn.”


    New issues

  • Ethias SA is pricing €250m 10y Green Tier 2 around 7% through JPM (B&D).

  • KfW is tapping €1bn 2.75% 2028 at swaps -22bps through Citi and GS (B&D).

  • Handelsbanken is pricing €1.25bn 3y at swaps +53bps through BNPP, HSBC, MS, Handelsbanken and UBS.