Front-end profit-taking; Spreads wider
Signs of a US debt deal with enough bipartisan support to suspend the debt limit, see USD Swaps, has helped to support global fixed income. In Europe, weaker-than-consensus Spanish inflation also lifted the market higher after harmonised CPI printed at 2.9%yoy vs 3.3%, down from 3.8% the previous month.
The 10y Bund future was last trading around 60 ticks higher while the 10y yield has declined by -5.5bps to 2.38%. Elsewhere, the Euro Stoxx has edged +0.2% higher.
In the front-end, red Euribors have rallied up to +12bps while ECB €STR Sep has declined by -2.1bps to 3.688% last. “We moved quite fast (higher) and so fast money are likely profit taking,” felt one trader.
In swap spreads, the front-end of the curve is wider despite signs of the US reaching an agreement on the its debt. “It is a bit surprising perhaps… But then the underlying is rallying a bit,” one trader pointed out.
Last Bund ASW prices were Schatz at 80.5bps (+2.6bp), Bobl at 73.6bps (+0.8bp), Bund at 68.4bps (+0.4bp) and Buxl at 29.7bps (+0.4bp).
Dutch parliament to vote on pensions
According to newswire fd.nl, the Dutch Senate is expected to vote “late on Tuesday evening” on the new pension law. For further details, please see here.
Listen to the ECB - SocGen
In its latest rates weekly Societe Generale recommends listening to the ECB and notes the market has also began scaling back its rate cut expectations. It writes:
- "The market has started listening to the ECB’s talk and is not only again considering an ECB terminal rate above 3.75%, but has also scaled down its rate cut expectations, in line with our recommendations.
- "The repricing has re-steepened the EUR 1-2y and flattened the 5-10y and 10-30y spreads. In line with the 1-2y steepening, the 2-5-10y fly moved up. The 2-5y slope has preserved the flattening trend, inverting below -45bp. We recommend keeping 2-5y flatteners, targeting levels below -50bp and even as low as -60bp.
- “EUR 2-5y flatteners are now a relatively safe carry trade. The very front end and the 2-5-10y fly will end up moving down again. In the late stage of the cycle, the front end of the curve continues flattening, and the long end is first to steepen, so the belly is outperforming the wings. Our curve recommendations therefore remain unchanged.”