EUR Swaps: Issuance slows; ASWs widen; Don't sweat collateral

Line chart 25 Mar 2021
The pace of issuance is slowing down and ASWs are wider. Some argue collateral concerns are overdone.

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  • Issuance slows; ASWs widen
  • Collateral concerns overdone - Commerzbank
  • New issues

    Issuance slows; ASWs widen
    The pace of activity is slowing down in euros ahead of the Ascension Day holiday tomorrow with only a couple of new issues expected to price today.

    Meanwhile, the Bund future was last up 40 ticks, partially recovering some of yesterday afternoon’s US-driven selloff. Elsewhere, the Euro Stoxx was near unchanged at +0.05%.

    “The start of the week we saw some decent two-way flow on the back of issuance,” said one trader, referring to swapped issuance from the likes of yesterday’s KfW €3bn 7y Green versus sovereign supply from Belgium’s €4bn 20y syndication. “We flattened a bit after the Belgium deal but have come back today,” he noted with EUR 10s/30s last +0.5bp at -31.5bps, and around +10bps steeper since the start of the month.

    Amid the slowdown in issuance activity Bund asset swap spreads are wider across the curve. Last prices vs 6mE were Schatz at 82.4bps (+1.3bp), Bobl at 74.1bp (+1.2bp), Bund at 69.4bps (+1.1bp) and Buxl at 32.8bps (+0.5bp). "There's maybe some opportunistic buying interest after recent narrowing," one source suggested. 

    In basis, 3s6s was wider at the front-end of the curve while the 5y and 10y sectors were near unchanged. Note that 5y and 10y 3s6s basis tightened yesterday despite heavy swapped issuance in euros - sources suggest that Yankees coming back to EUR may have been a factor in the marginal narrowing, against the backdrop of global pressure on duration around the Pfizer USD megadeal.  

    In latest ECB speak, Spanish central banker De Cos said today the ECB is “getting closer to the end” of its tightening cycle. It marks a contrast to hawkish comments yesterday when Austrian central banker Holzmann said he would have preferred a 50bps hike at the May meeting and favoured a terminal rate of 4%. Today Euribor futures are little changed with whites +1-2bps firmer while reds are down -0.5-1.5bps.


    Collateral concerns overdone - Commerzbank
    In a strategy note published yesterday Commerzbank argues that collateral scarcity concerns “appear overdone”. It finds Schatz ASW valuations are at “very ambitious levels” and recommends scaling into shorts around 90bps vs 6mE, or 65bps vs €STR. It writes:

    • “Speculation on Bundesbank remuneration adjustments look set to linger, but we doubt that the impact on Bund repos/specials will be as drastic as current ASW premiums are discounting.

    • “Our novel estimation and analysis of the DFA's structural collateral provision suggests that more than just "Bundesbank carry" is at play, arguing for steady collateral supply rather than scarcity.

    • “Lower net issuance in Q3/Q4 is on the cards though. Besides lower expenditures for the Economic Stabilization Fund, which will probably not be needed in full given the positive development of energy prices, parking excess issuance at the Bundesbank has become costly. In addition, it is not clear whether the capacity of reverse repos would be sufficiently large and available in dynamic market environments, which is probably a key condition for the DFA's strategic planning of the funding mix.

    • "In short, collateral scarcity concerns appear overdone. Combined with the latest ASW-decoupling from the slide in implied vols to 11m lows - the other key factor in our structural fair value model - this is leaving Schatz ASW valuations at very ambitious levels: the model-implied Schatz spread is at the lowest level in almost a year and the model residual is close to the all-time highs from last year's scarcity hype.

    • “For sure, back then Schatz spreads did not command a safety premium and overshooting on risk-off constitutes the major risk for ASW shorts. For now, we reiterate our cautious tactical stance on Schatz spreads but recommend using widening episodes above 90bps (invoice spread vs. 6m Euribor, corresponding to 65bp vs. €STR) to resume strategic tightener.”


    New issues

  • Fortum Oyj is pricing EUR 5y around swaps +120bps and EUR 10y around swaps +170bps through Barclays, BNPP (B&D), Danske, ING, Mizuho and Nordea.

  • Fiserv Inc, a US electronic company, is pricing EUR 8y around swaps +165bps through Citi (B&D), MUFG and WFC.

  • Jyske Realkredit is pricing EUR 7y Covered at swaps +30bps through Commerzbank, Danske, DZ, ING and Jyske.

  • Kexim, Export Import Bank of Korea, plans EUR 3y, 5y or 7y after investor meetings on 22 May through Citi, CA, HSBC, IN, JPM and SocGen.

  • CA Auto Bank SpA plans EUR fixed income calls on 3 April through CA.