EUR Swaps: Buying bias; Long-end steepens; Eurex/LCH

Buying bias; Long-end steepening
European fixed income began today’s session with strong gains as the 10y Bund future rallied up to 1.35 points earlier. The market has since retreated following lower-than-consensus US Initial Jobless Claims (237k vs 250k) with the 10y future last up 85 ticks and the 10y Bund yield marked around 2.50% (-7.5bps).

“The market is feeling a bit thin... there’s not a lot of (euro) issuance around and we are driven by the US,” reckoned one euro trader speaking earlier. Ahead, he felt there was scope for euro fixed income to be resilient, “Given recent positioning and unwinds of shorts, there seems to be a bit of a buying bias,” he suggested.

Elsewhere, the front-end has posted gains with white EURIBORs 2.5bps-8bps higher and reds 10bps-12.5bps stronger. “The front-end is the real driver (of the swap curve) and has been for a while,” noted a dealer.

Across the curve, 2s/10s was a touch flatter at -73bps (-0.5bp) while 10s/30s has seen decent steepening to reach -41.25bps (+3.5bps). “For the long-end to steepen we really need that move at the short-end of the curve,” a trader contended.

Bund asset swaps were last near unchanged with last prices Schatz at 71.1bps (+0.1bp), Bobl at 70.5bps (-0.2bp), Bund at 66.3bps (+0.1bp) and Buxl at 31.0bps (+0.1bp).

Tighter 10y Eurex/LCH basis - BNPP
Strategists at BNP Paribas expect 10y Eurex/LCH basis to “head towards zero” over the medium-term (vs 3.1bps-mid on the screens today and a range around 2.5-4bps through 2023) and await swap clearing recommendations from ESMA:

• “All factors point to a medium-term move in the 10y Eurex/LCH basis back towards zero, our analysis finds, with short-term risk of a move higher due to favourable seasonality.

  
  

• “Outsized representation of Dutch clients on Eurex may help explain the move higher in 10y CCP basis since Jan 2022. We believe that less Dutch treasury hedging going forwards means 10y basis could move lower.

  
  

• “Our expectation of declining rate vol in H2 supports CCP basis re-convergence towards 0bp, while the new requirement for EU pension funds to clear IRS is likely to put downward pressure on the long-end CCP basis.

  
  

• “Upcoming active account requirement regulations are likely to drive increased Eurex liquidity, although this will be a gradual process.

  
  

• “The European Securities and Markets Authority recommendation on the percentage of swaps required to be cleared in the EU will be closely watched.”

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