EUR Swaps: Real money buying; CTA short-covering

Real money buying, CTAs short-covering
The bearish momentum in fixed income stalled today as Bunds led a global rally with the 10y yield down by -8bps at 2.63%. The move followed overnight weakness in Chinese stocks while today’s risk-off move in Europe has seen the EuroStoxx drop by -1%.

In terms of flows, “We’ve heard of asset managers buying cash (EGBs) since yesterday. Today there’s been some short stop-outs from CTAs in futures,” reported one euro dealer earlier.

In the front-end, white Euribors have gained 2-5bps while reds are up by 4.5-7bps. “Volumes are not massive. I wouldn’t say there are huge stops,” a dealer said. For instance, volumes in reds range from around 28k to 46k.

Further out, the euro swap curve pivoted around the 10y sector with 2s/10s flatter at -51.5bps (-1.75bp) and 10s/30s steeper at -36.75bps (+2.5bps). “This is a futures-driven move with CTAs playing a role,” it was pointed out.

Finally, Bund swap spreads have widened with the short-end of the curve leading the gains. Last invoice prices were Schatz at 71.7bps (+1.9bp), Bobl at 71.3bps (+1.2bp), Bund at 65.8bps (+1.0bp) and Buxl at 29.9bps (+0.7bp).

Drivers of recent Bund sell-off - SocGen
In a strategy note published yesterday, Societe Generale looks at drivers of the global fixed income sell-off. It writes:

• “The sell-off in Bunds is a response not just to higher UST yields but is also being driven by stronger-than-expected labour market data as well as better hard data… The 2024 cuts may turn out to be incorrect…. There are reasons to expect a resilient economy for a few quarters… supply, and not demand, remains the main economic hurdle today.

  
  

• “The current sluggish growth is taking place in an environment of high corporate margins, robust pricing power and a strong labor market. While there are no visible signs of changes in these factors, higher-than-expected inflation should keep the ECB on hold for quite some time, possibly into 2025.

  
  

• “To be sure, the lower-than-usual summer liquidity and market positioning may be playing a role in the recent move… In the eurozone, long-end real yields are nowhere as attractive yet, but our analysis of prior rate tightening cycles suggests that we are not far from the highs in Bund yields (or we may be at the peak)…”