ECB: ECB Made Major Stress Test Adjustment After Banks Took Rosy View (BBG Sources)
The latest BBG source report notes that “the European Central Bank made one of its most forceful interventions to date in its stress tests for banks, after lenders took what it viewed as an unrealistic approach to assessing risks to their balance sheet.
- People familiar with the matter told BBG that “banks, which are being asked in the tests to calculate the impact of specific economic scenarios, initially estimated their total capital ratio would decline by about 3.5 percentage points in a worst case. The ECB subsequently adjusted the figure, leading to an impact of about 5 percentage points in the final results.”
- The people went on to note that “while it’s standard procedure for the ECB to challenge submissions by banks, the relative effect of this year’s so-called quality assurance phase is larger than in several previous tests.”
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GERMAN AUCTION RESULTS: 2.80% Jun-25 Schatz
| 2.80% Jun-25 Schatz | Previous | |
| ISIN | DE000BU22015 | |
| Allotted | E4.488bln | E4.889bln |
| Avg yield | 3.15% | 2.82% |
| Bid-to-offer | 1.18x | 1.07x |
| Bid-to-cover | 1.45x | 1.32x |
| Average Price | 99.338 | 99.951 |
| Low acc. Price | 99.335 | 99.950 |
| Pre-auction mid | 99.329 | 99.942 |
| Previous date | 23-May-23 | |
| Total sold | E5.5bln | E6bln |
BONDS: Tsys Bear Steeper In Return To Cash Trade, As Gilts Partially Recover
The US curve is modestly bear steeper in the return to cash trade after Monday's holiday, catching up to moves in futures and in Europe. Bunds and Gilts meanwhile have unwound some of Monday's selloff, with the German and UK curves bull flattening.
- The UK move is in some contrast to the sharp bear flattening prior, which included one of the weakest days of 2023 for the short end (2Y yields touched a fresh post-2008 high before pulling back). That said, Gilts are off highs slightly after a mediocre auction of new Jun-28.
- Central bank hike pricing sits fairly flat on the day, with BoE terminal implied standing out at -4bp on the day (at 5.91%, still well above the 5.84% at the end of last week).
- EGB periphery spreads are mostly tighter, led by Italy, which had led spreads wider on Monday.
- Data has been 2nd/3rd tier: Euro current account surplus pulling back sharply in April vs Mar, albeit construction was decent after a weak month. US housing data is the highlight for the rest of the session.
- Today's ECB speakers haven't brought much new - reminder that MNI hosts Lithuania's Simkus in a live event at 0900ET/1400UK. For the Fed: Bullard, Williams and Barr appear later.
Latest levels:
- * Sep US 10Y futures (TY) down 4.5/32 at 112-29 (L: 112-23 / H: 113-7.5)
- Sep Bund futures (RX) up 24 ticks at 132.65 (L: 132.54 / H: 132.94)
- Sep Gilt futures (G) up 29 ticks at 94.24 (L: 93.88 / H: 94.52)
- Italy / German 10-Yr spread 1.9bps tighter at 158.5bps
GILTS: Light Downtick Around Average/Mediocre Auction
Gilts slip a touch around the time of the declaration of a mediocre round of demand at the auction of the new Jun-28 line, with the tail widening and cover slipping when compared to the most recent auction of a comparable line (although the tail width is nothing out of the ordinary for a new issue). Still, both the average and low prices seen at the auction were above pre-auction mids. Futures last show +35 on the day, while cash Gilts are 1.5-3.5bp richer across the curve.
