EUR Swaps: Flattening back; Clients eye EUREX/LCH basis
Flattening back; Clients eye EUREX/LCH basis
Supply remains in focus and includes a CofE €1bn 5y deal while sovereign issuance has brought a €4bn 10y German tap.
The euro swap curve has flattened back after yesterday’s steepening with 2s/10s last at -51bps (-2bps) and 10s/30s at -33.5bps (-1.5bp).
In latest ECB speak, Knot said the market may be underestimating the chances of a September hike. Euribors lost up to 5bps and the Bund future dropped around 50 ticks, although both have since rallied back to -3bps and down 20 ticks.
Bund asset swap spreads continue to tighten and some banks expect the tightening to continue over the medium term (see below). Last Bund ASW prices vs 6mE were Bobl at 64.5bps (-0.6bp), Bund at 60.5bps (-0.7bp) and Buxl at 24.5bps (-1.7bp).
Elsewhere, the seasonal return of new issuance and its associated hedging through interest rate swaps presents an opportunity for end-users to access increased market liquidity. But when it comes to gaining access to the EUREX/LCH basis market, clients say you have to act quickly. For more, see Clients eye EUREX/LCH amid seasonal flows.
Re-enter strategic ASW shorts - Commerzbank
In a strategy note published today, Commerzbank recommends re-entering strategic ASW shorts. The bank writes:
- "Swap spreads continue to grind tighter and Schatz-spreads vs. €STR have even taken out the key 40bp mark. Although the bulk of the latest leg tighter mostly reflects the usual collapse of the futures roll, risks of self-reinforcing cash/ASW-richening have fallen significantly when adding persistently cheap levels of GC, specials and BuBills to the equation.
- "Hence, markets are turning the page on the Bundesbank faster than we had anticipated but add weight to our core conviction that the Bundesbank's remuneration will become 'just' another reference rate rather than the pricing benchmark for German paper and that the supply of and demand for collateral constitute the key pricing factors.
- "As these continue to argue for tighter spreads amid still elevated forward specialness and hence attractive risk-adjusted carry, we have resumed our strategic ASW shorts."
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