EUR Swaps: Volatile ahead of ECB
Volatile ahead of ECB
Today was meant to be about US CPI data, but a Reuters sources story hit the screens beforehand with the newswire reporting that the ECB expects inflation to remain above 3% into next year.
As a result, the Bund traded lower during the morning session and then took a further hit after US CPI printed at 14:30 CET, later recovering and last trading just 20 ticks lower on the session. At the front-end, white and red Euribors are trading up to 4.5bps lower.
In swaps, the steepening momentum has stalled with the curve flatter and 2s/10s last down by 1.5bp at -55.25bps and 10s/30s down by 1.25bp at -35.75bps.
Elsewhere, new issuance has seen a sharp slowdown ahead of the ECB meeting tomorrow. Bund asset swap spreads are steady across much of the curve with last prices vs 6mE, Bobl at 65.2bps (-0.3bp), Bund at 61.1bps (-0.3bp) and Buxl at 24.8bps (unch).
Bund spread narrower - JP Morgan
Strategists at JP Morgan holds a medium-term narrowing bias on swap spreads. In its summary the bank writes:
- "We retain a medium-term narrowing bias on swap spreads across the curve which primarily refects our view of easing of financial conditions as we approach the end of the hiking cycle and the market transitions towards an easing cycle in 2H24 and beyond... we believe that markets are currently pricing too tepid a pace of rate cuts in reds and greens and we are biased towards fading this. The evolution of this over the medium should be supportive of narrower spreads overall, in a manner that is the reverse of the 2022 dynamic when aggressive hikes had pushed swap spreads wider.
- "Nevertheless, we remain cognizant of several idiosyncratic factors impacting the different sector of the curves and therefore are cautious in outright narrowers currently. Other supportive factors are: a) the expected reduction in collateral scarcity, already reflected in a cheapening of funding rates; b) bias some from financial institutions to partly reverse the hedges implemented at the early stage of the tightening cycle."
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