EUR Swaps: USTs and ECB inflation report spark Bund rally; Fade ASW widening?

USTs and ECB inflation report drive Bunds
Overnight gains in USTs and a decline in the ECB’s survey of consumer inflation expectations helped to drive Bunds higher today. The 10y future surged over 1.5 points while the 10y yield has fallen by around 16bps to 2.44%, wiping out August’s bond selloff.

On the overnight move in USTs one euro trader observed that, “It was a decent steepening across 2s/10s and -70bps seems a bit of a level.” UST 2s/10s has bull-flattened back to -73bps at the time of writing. 

Then came the ECB’s Consumer Expectation Survey (CES) report, “The 5y5y inflation swap has been in focus the past few sessions and today that drifted back after the ECB survey,” said one euro swap trader. It was last marked around 2.63% (-3.5bps) having peaked near 2.67% on the screens yesterday.

Similar to the recent move in USTs, the euro swap curve has sharply bull-flattened with 2s/10s last at -58.25bps (-7.25bps) and 10s/30s at -38bps (-1bp). “There’s been some receiving around the 10y point… less so in the longer-end as most (real money) clients we speak to are on vacation now,” a dealer said.

Dare to fade the pop in Bund ASWs?
Elsewhere, dealers continue to debate the impact from the Bundesbank’s announcement late Friday to reduce the remuneration of sovereign deposits to 0% from 1 October.

Invoice spreads versus €STR are wider today, although they have yet to break through yesterday’s opening highs. Last prices were Schatz at 50.9bps (+2.3bp), Bobl at 48.0bps (+2.6bps), Bund at 45.3bps (+2.1bps) and Buxl at 23.7bps (+1.8bps)

“For those who dare there has been some interest to fade and sell the 10y Bund spread,” one euro dealer reported. “Therefore we could see more flattening still,” across the Bund ASW curve he felt.

Long-term ASW tightening to resume - Barclays
In a note published yesterday morning, Barclays expects Bubills and Schatz ASWs to richen in the short-term. However, longer-term the bank argues a repeat of September 2022 is unlikely. It concludes, “Once greater clarity emerges, the tightening trend in ASW should resume”. The bank explains:

• “The market will watch closely the evolution of government deposits at the Bundesbank over the coming weeks. Furthermore, impact on different pockets of the market like Bubills vs €STR, German repo rates and general government deposits with commercial banks etc would also provide colour on the intensity of scarcity dynamics. The ECB’s guidance around remuneration of non-monetary policy deposits alongside actions of the German Financing Agency will be closely watched.

  
  

• ”While it is challenging to provide a point estimate on how far Schatz ASW spreads could widen and when the peak may occur, what can be said with somewhat stronger conviction is that: (i) the peak should be well below the c.80bp reached in September 2022 and (ii) the structural tightening trend in ASWs is unlikely to be derailed.

  
  

• “The conviction comes down to the point that the initial conditions are significantly different from those in 2022. Specifically: (1) Outstanding public deposits at the Buba have shrunk considerably… (2) This is not your elder sibling’s Bund market… there is a fundamental difference vs the past few years… the free float of Bunds is on a slowly increasing trajectory… with the launch of NGEU and joint issuance of debt, the EU crossed a Rubicon that increased cohesion across member states and reduced fragmentation risks… (3) ECB and DFA are more alert to collateral scarcity…”

  
  

• “In sum, the uncertainty around how the plumbing copes with a 0% ceiling should increase the richness of German collateral and hence widen ASW spreads. Once greater clarity emerges, the tightening trend in ASW should resume. But for now, Buba’s actions are likely to have thrown the market into a state of flux. All eyes would be on the ECB and DFA to see how they respond to any strains that may arise.”