EUR Swaps: Fed eyed; Flattening; The case for a 50bp ECB hike

Bond chart table 30 Jan 2023
European stocks have been resilient after the recent US wobble. Traders eye the Fed decision, while the euro swap curve has flattened.

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  • Fed eyed; Flattening curve
  • ECB to hike 50bps - BofA
  • New issues

    Fed eyed; Flattening curve
    European stocks have so far been resilient following yesterday’s US bank wobble, see USD Swaps. The Euro Stoxx Banks Index was last up by 0.2% while the broader Euro Stoxx was up by 0.6%.

    A “pretty boring” session for Bunds has left the 10y future trading around 20 ticks higher and the 10y yield marked at 2.24% (-1.75bp). “It’s all about the Fed,” shrugged one dealer, looking ahead to today’s FOMC decision where consensus is for a 25bps hike.

    In euro swaps the direction has been flatter, “A 25bp (ECB hike) is looking more likely (than 50bp) and the thinking is that will lead to some more flattening… That’s not to say we are seeing new positions, more likely people cutting back ahead of the ECB and Fed,” said one trader.

    Last prices across euro swaps were 2s/5s at -45.5bps (-2.5bp), 5s/10s at -6.5bps (-1.5bp) and 10s/30s at -4.0.5bps (-0.5bp).

    Elsewhere, the pace of euro new issuance has slowed down sharply although Melbourne Airport has popped up with plans for a EUR 10y and follows Sydney Airport’s €1bn 10y a couple of weeks ago, see Basis: Aussies point to direction of travel

    Bund asset swap spreads across the longer-end were a touch wider while the Schatz ASW has held steady with no signs of additional widening pressure. Last prices were Schatz at 83.4bps (-0.1bp), Bobl at 76.4bps (+0.4bp), Bund at 72.0bps (+0.3bp) and Buxl 36.9bps (+0.6bp).


    ECB to hike 50bps - BofA
    Strategists at BofA expect the ECB to hike by 50bps but acknowledge this is not consensus and expect “a very close call” between 25bps and 50bps. Writing today, they contend that:

    • “Core inflation came in at 5.6%yoy, down only a few bps from the record high March print. This is in line with consensus but above our expectations of a decline to 5.4%… not significant enough for the ECB to argue that the peak in core inflation is behind us. In addition, lending standards and flows did not deteriorate beyond what might be expected given macroeconomic fundamentals.

    • “On the margin, we still expect the ECB to deliver a 50bp hike this week. This should come with an emphasis on data-dependence, an indication that there is still ground to cover, and a clear signal on the need for a sustained move lower in core inflation for them to pause in the hiking cycle… 3.75% is a lower bound for the terminal rate…

    • “The ECB may still decide to hike rates by 25bp this week. There are strategic considerations… Slowing down gains some time for that "noise" to fade away and limits the risk that the ECB has to press harder than we expect them to do, at the risk of breaking something more meaningfully. While we still expect a 50bp move this week, it is a very close call…”

    The bank also suggests the likely market impact from a 25bps or 50bps hike:

    • “We would expect a 50bp hike to translate into a higher terminal rate and put bear-flattening pressure on the 2s/5s curve.

    • “On the other hand, because a 25bp hike would mark another slowdown in the pace of tightening, it has the potential to unleash some duration buying from investors who have had a bullish view on fixed income but have so far limited their investments (with a still underweight positioning), waiting for more clarity on the path ahead. The question then will be whether this duration buying can offset the increased duration risk delivered via EGB issuance in May. If that is the case, then this should drive a bull flattening of the Bund curve (especially if the very front of the curve doesn't richen much more on asset swap).”


    New issues

  • Melbourne Airport plans EUR 10y after investor meetings on Tuesday May 9th through BNPP, Citi and GS.

  • Copeland (Emerson Climate), a German manufacturer, plans EUR ($500m equivalent) long 7y NC3 as well as $2.25bn long 7y NC3 following investor calls on May 4. Leads include Barclays (B&D), RBC, WFS, GS, BNPP, JPM and Mizuho.

  • Sparkasse Pforzheim Calw is pricing €500m (max) 6y Covered around swaps +14bps through Commerzbank (B&D), Deka and Helaba.

  • Schleswig-Holstein is pricing EUR 5y at swaps -8bps through Commerzbank, DZ, GS, Helaba and UniCredit (B&D).