EUR Swaps: Bunds pressured; Panicky ECB paying

Bunds pressured; Panicky ECB paying
Bunds have taken a hit during the Ascension Day holiday with traders struggling to identify a specific driver. Sources blamed a mixture of recent ECB speak and possibly some catch-up with US markets and debt limit news.

Possible re-setting of steepeners was also mentioned, while in the longer end 10s/30s gained +1bp to near -33.25bps after taking a hit the previous couple of sessions.

The 10y Bund future was last down a point and the 10y yield up +10bps at 2.435% while the Euro Stoxx was +1.2%.

In the front-end, there was talk of panicky paying in ECB dates with €STR Sep last marked +1.5bp at 3.671%, up from 3.60% a week ago and edging closer to the early March 2023 highs around 3.73%. Latest ECB speak today included ECB Vice President de Guindos saying, “We still have a way to go in the tightening journey.” Earlier this week, ECB and Austrian central banker Holzmann said he would have preferred a 50bps hike at the May meeting and favoured a terminal rate of 4%.

Amid the Bund selloff, swap spreads are tighter across the 5y to 30y sectors with last prices Bobl at 73.0bps (-0.6bp), Bund at 67.7bps (-1.6bp) and Buxl at 31.0bps (-1.8bp).

Declining TLTRO and liquidity - Deutsche Bank

Strategists at Deutsche Bank discuss declining TLTRO borrowings. Ahead, the bank sees a more sustained decline in excess liquidity. It writes:

• “As we assess liquidity conditions over the second half of the year, a couple of things are worth noting. Firstly, TLTRO borrowings have already halved relative to peak levels at €1.1tn outstanding currently - this may not be obvious when looking at excess liquidity levels.

  
  

• “With another €477bn maturing next month, this will bring levels back to pre-covid usage, without any further pre-payments. From that point, it may be the case that banks substitute it with shorter dated ECB facilities, limiting the extent to which excess liquidity declines can be driven by TLTRO repayments.

  
  

• “Part of what has made this transition so smooth so far has been other factors driving excess liquidity. Far from falling further due to the additional impact of QT, it has been buffered by outflows from the non bank facilities, as well as a reduction in cash holdings in response to positive rates.

  
  

• “At this stage, we would assume the bulk of the adjustment in the usage of these facilities has already occurred, and on the QT front the ECB will halt APP reinvestments completely from July. With less scope for offsetting factors, this should allow for a more sustained decline in excess liquidity.”

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