EUR Swaps: Long-end flattens as RM eyed

Long-end flattens as RM eyed
The Bund future has so far had a muted session following yesterday’s one point sell-off, today down 20 ticks while the 10y yield was marked at 2.47% (+3bps) and the Euro Stoxx +0.65%.

In swaps, one sector in focus recently has been the long-end of the euro curve after EUR 10s/30s saw decent steepening in recent weeks. Today it was marked down -2.75bps at -37bps, adding up to -5bps of flattening across the past three sessions. The move comes as some sources suggest that a revival of real money receiving will likely add some flattening pressure in the near-term.

In the short-end, ECB €STR dates continue to edge higher with Sep last +1.4bp at 3.689%, and around 10bps higher than a week ago. Note there has been talk of some “panicky paying” after recent hawkish ECB comments while fast money accounts are also said to be in the mix.

Elsewhere, Bund asset swap spreads are tighter with last prices Schatz at 80.5bps (unch), Bobl at 72.9bps (-0.6bp), Bund at 67.6bps (-1.0bp) and Bobl at 30.1bp (-1.8bp).

Hold EUR 10s/30s steepener - Citi
Strategists at Citi assess recent steepening in EUR 10s/30s and continue to favour holding the position. It writes:

• “With short-expiry EUR vols hovering around one-year lows after collapsing over the last couple of months, long-end steepeners may feel vulnerable should the echoes of the US banking turmoil and debt ceiling saga become less important – bringing investor focus back on the struggle of global CBs to cool down economic activity (with US initial jobless claims back below 250k)…

  
  

• “Long-term, we find it hard not to be in long-end steepeners, with the curve still extremely flat by historical standards… Historically, EUR 10s/30s steepeners have shown a tight correlation with USD, which somewhat conflicts with what currently priced… However, such metric is probably inaccurate: while the realized volatilities of the two monthly PnL are similar, we have noticed above that implied volatility tends to co-move with the curve PnL…

  
  

• “We therefore filter our strategy by paying EUR curve against USD for negative monthly changes in USD implied vol of at least 6bpv. Conditional on lower volatility, the strategy yields 85bp on a cumulative basis, with a Sharpe ratio of 0.35. Therefore, EUR 10s/30s steepeners should outperform USD in a scenario where implied vols keep correcting lower.”

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