EUR Swaps: Sell-off continues, ASW tighter; EU; Dutch PF reforms

Sell-off continues; EU dual tranche
Euro fixed income has begun the week selling off with the 10y future last down by 85 ticks and the 10y Bund yield marked +7bps at 2.38%. “It’s a bit of a continuation after Friday’s (stronger-than-consensus) payroll figures,” observed one euro trader, “US data is likely to keep setting the tone,” he reckoned.

Elsewhere, Brent oil popped higher at the open after reports over the weekend that Saudi Arabia plans to restrict supply. The front Brent contract was last trading +$1.35 at $77.48 after earlier peaking at $78.73 today having failed to reach the April 2023 highs around $87. In euro inflation swaps EUR 1y was last marked +4bps at 2.85% with 5y5y +2bps at 2.52%.

In swaps, one source reported that activity had been “pretty light as you’d expect” at the start of the week. Still, several issuers are working on euro deals including the EU and a handful of banks such as BofA, SMFG and Santander.

Spreads are tighter across the curve despite potential asset swap demand for the EU deal. “That seems to be led by the sell off in the Bund,” a trader noted, “We could see a bit of support to the Bund in the afternoon as a few deals price.” Last prices in ASWs were Schatz at 74.8bps (-1.9bp), Bobl at 71.3bps (-1.7bp), Bund at 66.2bps (-1.9bp) and Buxl at 29.1bps (-1.8bp).

Elsewhere in supply, European Union has today announced that it plans to tap 1.625% Dec 2029 and 3.375% Nov 2042 through Danske, DB, GS, JPM and SocGen. One dealer agreed the EU supply could draw some ASW buying interest and possibly lend some support to spreads. Shorter in, KfW has announced a 3y via BofA, Commerzbank, CA and TorDom. 

Dutch pension reform impact - NatWest

In its weekly rates research NatWest looks at the possible impact of Dutch pension reforms and sees risks skewed to long-end curve steepening. It writes:

• “The key aspects of the Dutch pensions reform have been known and well covered for months. The extension to the transition period to 2028 was a last minute thing, but just reinforces the key conclusion, which is that this is will be a firmly secondary force in coming years.

  
  

• “Secondary steepening: The main conclusion, that over time the transition may involve a shortening in ALM emphasis and perhaps some overall reduction PV01 hedged is reasonably consensus but over time should support some curve steepening.

  
  

• “More hedging in preparation? The more pressing question is whether schemes will try to hedge more in the short term in order to stabilise solvency levels in order to underpin their transition planning. The risks may be skewed in that direction, particularly at higher levels of rates, but it also isn’t clear that there is much to do. PV01 ratios have been improving dramatically already just because higher rates work magic when there is an ALM convexity mismatch. It’s far from clear that strategically pensions will want or need to close this gap materially further.

  
  

• “Expect Dutch pensions to be ongoing, but not dominant, buyers of long-term fixed income for the foreseeable future. There was, however, a big allocation into fixed income in Q4 last year. We don’t believe that it has been ongoing this year, we will come back with a look at the data…”

EUR 10s/30s swaps is a touch flatter at -35.6bps (-0.6) today after steepening sharply for much of last week before snapping a couple of bps flatter on Friday. 30s/50s is just off 2023 steeps at -32.1bps (-0.2). 

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