EUR Swaps: BOE eyed; Front ASWs lead widening

BOE eyed; Front ASWs lead widening
The Bund has traded bearish again today with the 10y future last down by 40 ticks and the 10y yield marked around 2.56% (+2.5bps). Elsewhere, stocks are weaker across the board with the Euro Stoxx last -0.7%.

“It’s a bit of a continuation of the move after yesterday’s (US) ADP data,” noted one euro trader, “We’re testing the lows of last week (in the Bund) but the next cue will likely come from the BOE,” he felt.

The Bank of England will announce its latest rate decision at 13:00 CET with consensus for a 25bps increase to 5.25% although a 50bps hike has not been ruled out. “If they go for 25bps then we could see a bit of a relief rally,” a dealer felt.

Back in euros, the front-end of the Bund spread curve continues to widen with the Schatz last +2.5bps at 68.5bps amid reports of short positioning.

Meanwhile, Commerzbank writes today that it continues to see value in receiving Schatz vs Bund ASWs, “In repo, the lack of volatility of spot repos at cheap levels alongside perfect transmission of the ECB July hike mask the massive gap to the forward specialness premium implied by swap spreads. The Bundesbank remuneration debate is heating up following the ECB’s surprise MRR adjustment. Dissecting the arguments as well as second and third order effects we conclude that a Buba-driven widening would likely be short-lived. Combined with attractive risk-adjusted carry we reiterate our ASW tightener and continue to see value in receiving Schatz vs Bund spreads.”

Last Bund ASW prices vs 6mE were Schatz at 68.5bps (+2.5bps), Bobl at 68.6bps (+0.8bp), Bund at 64.2bps (+0.1bp) and Buxl at 29.2bps (-0.4bp).

Risk to BOR/€STR widener - BofA
Strategists at BofA update their ECB balance sheet forecasts and see risks to the bank’s BOR/€STR widener position. It writes:

• “We forecast the Eurosystem’s balance sheet to fall from €8trn at the end of 2022 to €6.9trn at end-2023 and €6trn at end-2024. Our forecast is based on the assumption of continued full passive quantitative tightening (QT) in the asset purchase programme (APP) portfolio and a start of partial passive QT in the pandemic emergency purchase programme (PEPP) from 2H 2024.

  
  

• “We also assume remuneration changes to government and non-euro area resident deposits at the Eurosystem, given the ECB’s recent focus on minimising the interest it pays on liabilities. This is likely to cause a shift among the central bank’s liability components, with these deposits flowing into reserves, and consequently slow the decline in excess liquidity.

  
  

• “While we continue to expect bank demand for reserves and term funding to sustain, upside risks to the excess liquidity profile is a risk to our Euribor vs €STR widener view.”