Bund tests post-CPI highs; Vol softens
The Bund added to its pre-data gains today after US CPI printed a few bps below the fix and the UST curve bull-steepened. The German future spiked to 136, drifting down to 135.75 and recovered back to 136, +60 ticks on the day. EURIBORs are +7bps in the reds versus +11bps for red SOFRs and ECB €STR for Dec23 is testing 3.50% again.
With euro new issuance slower after a busy start to the week, asset swap spreads were a touch better bid with the Bobl at 74.5bps (+0.6) vs 6mE and the Bund at 69.7bps (+0.6). 3s6s was also up again with 5s at 7.9bps (+0.1) and 10s at 3.1bps (+0.2), testing the upper edges of their recent ranges.
SDR swap volumes (link) are running mildly above-average despite the lack of new euro deals and the curve is steady after recent steepening at -42.3bps (-0.4) in 2s/10s and -34.3bps(-0.2) in 10s/30s.
Finally, after a lacklustre session yesterday, euro gamma vol fell across much of the grid following the release of the CPI. 1m10y lost 4.8nvol while 3m10y and 3m30y were 2.5-3.0 nvol softer. 1y1y fell 3.0 nvol but 5y5y was unchanged.
Banks liked steepeners in their post-ECB, pre-CPI research. Barclays, for example, recommended initiating 10s/30s trades with the following rationale:
- “We find it increasingly unlikely that the ECB will reach a terminal rate above 3.75%...Especially with focus on growth risks likely to intensify in the second half of the year (with the US economy likely slipping into a recession)”
“We see attractive risk/reward in trades that can benefit from relative outperformance of belly/intermediate yields versus the long end: we therefore recommend EUR 10s/30s steepeners (entry -35bps).
“Investor focus could shift increasingly towards growth risks in the coming months, as the lagged impact of cumulative ECB policy tightening feeds through to the real economy…
“We view intermediate-tenor EUR yields as cheap, with EUR 5y5y vs. ESTR well above the upper end of the 2.0-2.5% range of neutral rate estimates generally provided by Governing Council speakers, as well as our own models
“Even after its recent steepening, EUR 10s/30s remains notably flat on a cross-market basis…(In addition) it appears notably flat versus the current level of implied vols…(And) on a seasonal basis, EUR 10s/30s steepeners have historically tended to perform well in May.”
Elsewhere, steepening was a “strategic theme to go with through this cycle” for strategists at NatWest, who preferred 2s/30s Bund steepeners (currently -9bps having steepened from -27bps at the start of May) to express their view:
- “Heavy bond supply and QT do matter, even though they are well socialized themes. Supply should burn through demand that has been pent-up over a decade, pumping term premium back up over time, particularly at the very long end.
“Duration demand in Europe is not likely to be as deep as often thought…If the Fed does start to cut rates sharply, it will restore carry on US duration. At that point, the European curve may also have to steepen to compete, regardless of whether the ECB cuts rates to help.
“We expect the long end to be driven by cash, with the market clearing thanks to ASW buyers who will need ever-cheaper valuations to stay motivated, particularly while rates stay lower.”
New issues: DB and SEB Covered Bonds, EU bookstats
- Deutsche Bank has priced a €500m 3.5y and €500m 10y Covered bonds at swaps +5 and 20bps. Leads are Barclays, DB (B&D), IMI-Intesa Sanpaolo, Lloyds, NatWest, Scotia, UBS and UniCredit.
- ESM has sent an RfP to its banks for a possible deal.
- Bausparkasse Wuestenrot plans a €250m 4y Covered bond. Leads are DZ, Erste, Helaba and UniCredit.
- SEB has priced a €1.75bn 2.5y Covered bond at swaps +5bps. Leads are Commerzbank, HSBC, NatWest, SocGen, Santander and SEB.
- Swedish telecom Tele2 is preparing a €500m 6.5y through CA, DB, ING and Nordea after meeting investors from May 10th.
- Islandbanki has priced a €300m 3y at 7.375%. Leads are Barclays, Citi, GS and JPM.
- Abanca Corp Bancaria plans a EUR 3y NC2 at swaps +225bps. Leads are BBVA, DB, Santander, SocGen and UBS.
- French metals group Eramet is preparing a EUR Sustainability bond. Leads are ABN Amro, CA, Citi, HSBC, Natixis and SocGen.
- Plucky soccer minnow Republic of San Marino plans a EUR deal.
- Sparkasse Hannover has priced a €250m 7y Covered bond at around swaps +18bps. Leads are Erste, Helaba and NordLB.
- The European Union yesterday sold a €5bn 3y at swaps -27bps and a €4bn tap of the 3% Mar 2053 at swaps +84bps. Books above €29bn and €59bn, respectively. Leads are BNPP, BofA, HSBC, MS (B&D) and UniCredit. Bank treasuries took 36% (€1.8bn) and banks took 8% (€400m) of the 3y, versus 19% (€760m) and 8% (€320m) of the 30y respectively.