EUR Swaps: ASWs tighter despite big EU supply; Front-end distortions

ASWs tighter despite big EU supply
Euro fixed income has rallied despite the RBA unexpectedly hiking rates overnight, see AUD Swaps. “The ECB’s latest inflation survey was perhaps a bit more dovish than expected,” said one source, while euro inflation swaps were up to 8bps lower at the front end.

The 10y Bund future was last up by 55 ticks with some market participants focused on the futures roll with the 2y Schatz seen as most interesting, “The Schatz roll has been weak as the back CTD June 25 Schatz has been outperforming.” Elsewhere, the Bund and Buxl rolls have the same CTDs and were thus described as “pretty uninteresting” with less likelihood for fireworks.

Elsewhere, some were surprised at today’s tightening in Bund ASW spreads given EU taps of €3bn 2029 and €4bn 2042 as well as news that France plans to sell a 15y OATi-39 inflation-linked bond. “You might have thought with the rally and ASW demand for EU paper we would have widened today,” said one. Later, Spain announced plans for a new 10y. 

Last Bund ASW prices vs 6mE were Schatz at 72.4bps (unch), Bobl at 70.0bps (-0.6bp), Bund at 65.7bps (-0.4bp) and Buxl at 28.7bps (-0.3bp). Outright EUR swap volumes are running above-average according to the US-entity skewed SDR (link) led by the 3y bucket as KfW prices a €5bn 3y.   

As for the EU supply, one source reported “reasonable demand” in the grey market. “Clearly some people got guaranteed bonds so were able to sell and lock-in profits with limited risk,” it was suggested. 

Front-end distortions - Commerzbank
In a strategy note published today Commerzbank says front-end distortions are unravelling with Schatz spreads under pressure into the roll. The bank resumes its strategic Schatz tightener. It writes:

• “At the front end of the German curve, the distortions are sequentially unravelling. BuBills have already moved off their extremes over the last couple of weeks. Spreads some 30-35bps through €STR are still 10-15bps richer than the levels that sovereigns or foreign reserves get at the NCBs.

  
  

• “Compared to bank deposits, however, short-dated paper still seem attractive. Yesterday’s ECB data show reasonable increases in term depo rates with rates up to 1y rising to 2.27% for households and 2.79% for corporates, which was 123bps respectively 71bp below 1y €STR, while the more relevant overnight rates saw only marginal increases to 0.18% for households and 0.44% for corporates.

  
  

• “With the future roll about to be completed on Thursday, Schatz spreads are also cheapening massively to the tightest level since SVB, before recovering late in the session. This is all the more notable considering the minuscule volatility in Schatz spreads over recent weeks. Similar to March, the roll seems to be worth almost 10bp in invoice spreads. Unlike then, however, a banking crisis is unlikely to reverse the tightening momentum.

  
  

• “Moreover, repo levels had been out of sync with the Schatz for some time and last month’s richening vs €STR subsiding, both in GC and in specials. We thus consider the environment conducive to resume strategic Schatz tightener.”

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