Front-end wary; ASWs eyed
The front-end staged a modest rebound earlier today after yesterday’s surprise rate hike by the Bank of Canada triggered a global rate sell-off. For instance, EUR 1y1y was last -2bps at 3.33% having surged over +10bps yesterday.
“Interestingly, we haven’t seen any major interest to fade the (front-end) sell-off, although that’s not to say some could arrive. But the Aussie and Canadian hikes have rattled the market a bit and perhaps made people a bit wary,” suggested one euro dealer. Near-dated €STR ECB dates have held onto recent gains with Aug last +0.3bp at 3.59% and Sep +0.6bp at 3.709%.
Meanwhile, a much quieter day in euro issuance amid regional holidays in Germany has given the market some breathing space. The 10y Bund future was last down by -35 ticks while the 10y yield was marked at 2.462% (+0.75bp).
In swaps, the curve has steepened up a bit with flows said to be on the lighter side and 5s/10s last +0.75bp at -7.5bps and 10s/30s +0.5bp at -35.25bps.
In Bund asset swap spreads, strategists at Commerzbank today argue there is still scope for more tightening, The banks writes, “The tightening in Schatz swap spreads has taken a breather but Bobl and Bund spreads are catching up, hitting lows vs €STR not seen since March. With the futures roll finally being completed today and repo conditions easing while Bundesbank remuneration concerns are abating and the US bills supply deluge could lead to spillovers, we see more potential for tighteners.”
Recent front-end cheapening - DB
In a strategy note published yesterday Deutsche Bank examines recent cheapening in the front-end of the curve. It writes:
- “Over the past week, GC-€STR moved into positive territory at the start of June, while Bubills had been cheapening to OIS in the week prior to month-end. Looking at specific dynamics, it is also notable that Schatz repo (taking the average over a range of securities) has been less special for this roll period compared to previous periods, and Schatz spreads have also cheapened alongside.
- “It is unclear if this is a sustainable move, as there are no clear factors driving this - following the remuneration changes, usage of various ECB facilities has moved marginally lower, and it seems early for the upcoming TLTRO repayment to be having a major effect, though we broadly expected diminishing effects of the remuneration changes and one would also expect the liquidity decline and free float rise to start to have an effect over time.”