Gilt-driven; Issuance flow; Carry eyed
“Like yesterday, this feels a bit gilt-led,” said one euro swapper earlier as the Bund rallied 85 ticks while the gilt future was up by 1.25 points. The short-end has also seen a rebound today with red Euribors last up by 2.5bps to 5bps while red SONIAs have gained 10.5bps to 14bps.
Still, for some euro traders the focus remains on new issuance. “The ECB is out of the way and there’s not much in terms of macro data,” said one. Among the larger deals arriving today include Bpifrance €1bn 10y Green and Bank of New Zealand €750m long 5y Green.
“There’s been a few bids in 3s6s forwards and that suggests there’s maybe going to be swapped deals,” said one trader. The 5y 3s6s basis was last marked +0.2bp at 7.45bps and 10y 3s6s +0.25bp at 3.1bps.
Elsewhere, Bund asset swap spreads are wider by 0.5bp to 1bps. “That’s mostly due to the rally (in the Bund), but there are a few offers about as well,” a source said. Last prices were Schatz at 71.7bps (+1.2bp), Bobl at 69.0bps (+0.6bp), Bund at 64.0bps (+0.6bp) and Buxl at 29.6bps (+1.1bp).
More generally, one trader felt there was a resurgence in carry trades for summer and the next couple of weeks, “There’s been some interest in forward steepeners that carry OK,” a trader said.
Expect bull-steepening - BofA
Strategists at BofA expect the euro curve to bull-steepen over the medium term from around Q423. It writes:
- “We expect rates to rally after the terminal rate is reached. The pricing of cuts and slow grind lower in the market’s view of neutral can put bull flattening pressures on the curve. It is only as we approach the devilry of the rate cut, the dynamics of the curve is expected to evolve to bull steepening, from 2s10s and then in 2s5s.
- "Our economists expect the first cut to be delivered only in Jun-24 and this, in part, explains why our forecast imply less steepening than what the market is pricing in 1y ahead.
- “We also expect 5y5y Euribor to rally but by a lesser extent, reflecting the inflation in that period still expected to be above target and growing term premia in the curve against the backdrop of ongoing QT. The availability of bond supply, supported by QT, also leaves us with a bias for further asset swap tightening.”