Thinner markets eyed
The Bund is trading down by about 30 ticks with sources reporting a slow start to the week. “Activity has been lower-than-usual and the US holiday isn’t helping this week,” said one euro trader earlier, referring to the US July 4 holiday on Tuesday.
Still, a few new issues are pricing including EFSF €3bn 7y while London Heathrow and Rome Airports are both working on 10y SLB euro deals.
Meanwhile, Bund asset swap spreads are mostly wider, “There’s not too much to read into it…” felt one trader, although he agreed some clients could be looking for risk-off protection over the summer weeks when less liquid markets can sometimes have outsized moves.
Last prices vs 6mE were Schatz at 73.2bps (+0.6bp), Bobl at 71.3bps (+0.3bp), Bund at 67.0bps (+0.6bp) and Buxl at 33.6bps (+1.3bp).
Across the swap curve, the short-end is trading weaker with red Euribors up to 5bps lower while further out 2s/10s has flattened by 3bps to -89bps and testing the lows of last week. Further out, 10s/30s has also edged flattener and was last down by 1.5bp at -49.5bps.
Buy the duration dips - SocGen
In its latest rates weekly Societe Generale recommends buying Bunds above 2.40% for carry and targeting 2.40% with a range of 2.75/2.00% expected for 2023. It writes:
- “Not much volatility to expect from shifts in ECB policy expectations. ‘It is unlikely that in the near future the central bank will be able to state with full confidence that the peak rates have been reached’ said ECB President Lagarde in Sintra. This reflects strong uncertainty on precise meeting-by-meeting ECB decisions, except on the well telegraphed hike in July, a “fait accompli” according to de Guindos.
- “We stick to our view that the ECB will hike its deposit facility rate to 4% in September and then mark a long pause. The market also sees a 4% terminal rate by end-2023 but is not sure whether it will be reached in September.
- “This summer, we expect the market to price a terminal rate above 4%, which should help drive the Bund 10y yield above 2.50% – a good entry level for duration longs. We expect a 2.00/2.75% range for the Bund 10y yield in 2H23, as despite the uncertainty about the precise level of the ECB’s terminal rate, shifts in monetary policy expectations are unlikely to generate much trend in EUR long-maturity rates.
- “The market is unlikely to abruptly price a significant amount of additional tightening. On the other hand, sticky inflation means that the ECB will be in no rush to validate the market pricing of rate cuts from spring 2024.”