EUR Swaps: Spreads, bases mixed; Italy and the three bears

Italy flag 8 Jun 2020
Bunds are lower and bases are mixed as more issuance approaches. Italy gets lightly mauled by a trio of bears ahead of ratings news.

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  • Bunds down, bases mixed

  • Italy and the three bears

  • New issues


    Bunds down, bases mixed

    A steady slide took the Bund around half a point lower before stabilising today with hawkish ECB commentary and pre-syndication weakness in long gilts adding to the pressure. Speaking in Japan, Governing Council member Joachim Nagel warned of a “consensus” on the Council that rate hikes should continue “beyond the Summer break”. EURIBORs are 4-5 ticks lower in the reds and 2s/10s swaps is a touch flatter at -45.0bps (-0.9) while 10s/30s is steady at -33.5bps.  


    In spreads, after holding up yesterday against a mixed backdrop of heavy euro issuance versus renewed US regional bank weakness, the list of euro new deals is shorter today and S&P futures are +0.3% ahead of the US open. Schatz spreads are wider again at 82.7bps (+1.4) while Bobl ASW are steady at 75.0 (+0.1) and Bund are tighter at 70.3bps (-1.0).


    Basis is a touch better offered after yesterday’s bid and 10y €STR-BOR at 15.3bps (-0.1). In cross-currency, although yet another Reverse Yankee has popped up on the screens, this time from Honeywell, EDF is expected to be going the other way next week. EUR/USD XCCY is tighter and mostly steeper with 10y at -29.125bps (+1.625) with plenty of clips trading according to the Total Derivatives SDR.


    Gamma vol is taking back yesterday’s small risk-off bounce with 3m10y around 2 nvol lower and 1y1y down almost 3 nvol. And finally inflation is lower led by the 15y area of the French inflation curve after the AFT’s latest auction announcement left the way open to a new syndicated (and likely asset swapped) 15-20y OATi later this month.   


    Italy and the three bears

    A couple of banks this week turn wary on Italy, for a range of reasons including looming reviews of the rating. Spreads to 10y Bunds are currently range-trading around 189bps after edging tighter over the last couple of sessions. 


    Barclays recommends a tactical 10y Italy vs Germany short. It explains its thinking around the rating reviews, global risk factors and positioning:


      “We see room for Italian spreads to trade with a nervous tone into the Fitch/Moody’s reviews of the Italian sovereign rating, this Friday and next Friday respectively. In a similar vein, any further adverse headlines around Italy’s NGEU implementation could also encourage a further push wider in Italian spreads.


      “We see several potential triggers for a deterioration in risk sentiment including a further worsening of the US regional banking situation, or escalation of the debt-ceiling standoff. A significant deterioration of global risk sentiment would likely trigger meaningful widening of peripheral spreads in our view (especially heading into the upcoming rating reviews).


      “Peripheral spread-widening trades are likely significantly less crowded than had been the case earlier in the year, with many investors having closed these trades in the context of stubborn peripheral spread resilience in Q1. To this point, aggregate open interest in IK futures contracts remains significantly lower now than in early Q1, potentially in part reflecting the closing of short positions.”  


    Elsewhere, SocGen  is also wary following the recent French ratings action. While it doesn’t expect an Italian downgrade, SocGen “can’t rule out a change in outlook”:


      ”Two rating agencies will review Italian ratings in the next two weeks. While we don’t expect any change, we can’t rule out the possibility of an unexpected decision. Due to this possibility, as well as the acceleration of QT and upcoming TLTRO redemptions, risk aversion towards BTPs has risen recently. As a hedge and given 10y BTP will be the most impacted in the case of a rating change, we recommend a 2-10y BTP steepener vs Bunds to have a positive carry and rolldown of c.10.6bp/3M.”


    Finally , Commerzbank also urges a defensive stance and looks for the spread to re-test 200bps:


      “While the stable outlook of the BBB-rating appears to be at risk, not least after Fitch's negative rating action on France a couple of weeks ago, it seems more likely that Fitch skips the Italian review this week. More relevant in any case will be Moody's review next week, where any negative rating action would lead to a junk rating. Such rating concerns add to rising headwinds from €QT, TLTROs and the duration aversion of domestic banks. We therefore stay cautious on BTPs, looking for 10y spreads vs. Bunds to trade back above 200bps.”



    New issues

    • Honeywell plans EUR 4y and 9y bonds at swaps +55 and 95bps. Leads are DB, JPM (B&D), MS and UnicCredit.  


    • O-I Glass Inc. is preparing €500m 5y NC2 and $500m Green 8y NC2 bonds at around 6.5% and 7375%, repsepectively. Leads on the EUR tranche are CA, JPM (B&D) and WFS.


    • Bank fuer Tirol plans a €250m 4y covered through DZ, Erste, LBBW and RBI.


    • Melbourne Airport plans a EUR 10y through BNPP, Citi and GS.


    Recently priced

    • AT&T yesterday priced €1bn long 2y, €1bn 8y and €1.25bn long 11y bonds at swaps +40, 110 and 140bps, respectively. Leads are CS, DB (B&D) and MUFG.


    • L’Oreal yesterday priced €1bn 2y and €1bn 10y bonds at swaps +10 and 30bps. Leads are BNPP, Citi, CA, HSBC, JPM (B&D), Natixis, Santander and SocGen.


    • SpareBank 1 Boligkreditt yesterday priced a €750m 7y Green Covered bond at swaps +265ps through Deka, DB, ING and Nordea (B&D).


    • Deutsche Bahn yesterday priced a €500m 10y at swaps +50bps. Leads are DB, HSBC (B&D), MUFG and UniCredit.


    • Republic of San Marino yesterday priced a €350m long 3y at 6.5%. Lead is GS.