EUR Swaps: Bund drifts lower; Adding to duration longs

Bund drifts lower
The Bund drifted lower today with the 10y future last down about 30 ticks, spurred by comments from ECB’s Nagel that, “It’s much too early to think about a pause,” in rate hikes.

The front-end sold off and red Euribors are trading up to 5bps lower. Meanwhile, the risk backdrop is stable with the EuroStoxx up 0.8%.

Bund asset swap spreads have tightened by 0.2 to 0.5bp across the 5y to 30y sector. New issuance is absent from the market today after a busy start to the week saw several big deals price including EFSF €1bn 3y tap and €2bn 15y on Wednesday.

Ahead, a further revival of new issuance is expected and a pick-up in swapped issuance. At the same time, sources report interest from RV accounts to sell Bobl and Bund ASWs.

Elsewhere, 3s6s basis ticked lower today with 5y last -0.15bp at 7.2bps and down from the highs above 7.6bps a couple of sessions back.

Across the euro swap curve, 2s/10s is near unchanged at -54.25bps (-0.5bp) while further out 10s/30s has steepened up a touch to -35.75bps (+0.25bp).

Add to duration longs - SocGen
In its latest rates weekly Societe Generale recommend adding to duration longs when the Bund 10y yield moves above 2.50%. The bank writes:

• “Our analysis of the EUR term premium suggests limited near-term upside potential unless the ECB surprises with a radical acceleration of QT or rates vol redirects durably higher (e.g. because of a series of upside inflation surprises).

  
  

• “If EUR rates volatility continues to decline, as we believe it will with the ECB nearing the end of rate hikes, the EUR term premium will not have much room to move further up. Ongoing ECB balance sheet normalisation is consistent with a regime of higher term premia - but this is to some extent priced in. On our metrics, the ECB would need to significantly set up QT to provide a significant impetus for a higher term premium.

  
  

• “The summer sell-off has improved the risk/reward of euro area duration. So we maintain our view of adding to duration when Bund 10y moves above 2.50%, even if this is more for carry (assuming no repo funding) than the expectation of capital gains. For sure, we may observe yet another bearish wave on Bunds, as the market has room for a less dovish pricing of ECB rate expectations. Indeed, we continue to expect a rate hike in September and ongoing ECB pushback on rate cuts expectations with euro area core inflation set o print again well above 5% and with 5y5y inflation pricing above 2.50%, close to historical highs.”