FED FUNDS FUTURES: FFQ5 Lifted

German ASWs vs. 3-month Euribor within 0.3bp of yesterday’s closing levels.

• Fairly muted reaction to the move higher in outright bond yields.
• Long end swap spreads consolidate much of the recent widening.
• Little visible impact on benchmark ASWs from the impending Bund auction.
• Broader macro sentiment remains key for spreads intraday, while medium-term focus continues to fall on German issuance intentions and the country's fiscal situation.
• The medium-term factors seemingly remain bearish for long end swap spreads, but the highly volatile headline environment that we are operating in at present means that any such weakness in those spreads is unlikely to come in a straight line.
• Pre-existing short positioning in the long end may also provide increased vol. during any rallies.

This morning, Germany will hold a 10-year Bund auction, with E3.0bln of the 2.50% Feb-35 Bund (ISIN: DE000BU2Z049) on offer.

• The size is a step down from the last re-open of the 2.50% Feb-35 Bund on May 21, and is the lowest for an on-the-run reopen in the German 10y segment since November 2022. The 2025 issuance plan saw a reduction in these auction sizes relative to the start of the year, but there is a good chance that when the Q3 issuance plan is solidified we see 10-year auctions increase in size once more (given the expected increase in H2 issuance volumes).
• Demand metrics in German auctions have recovered recently, and that also applies to the 10-year segment. At that last May 21 auction, the bid-to cover came in at 2.42x and the bid-to-offer at 1.85x - a significant improvement from the 1.38x btc / 1.06x bto seen at the auction prior to that (April 23). These metrics compare to a 1.38x - 2.84x range for bid-to-covers and a 1.06x - 2.17x range for bid-to-offers seen in German 10y auctions this year.
• At the last auction on May 21, the secondary market mid-price has also been below the lowprice again - contrary to the two 10y auctions ahead of that.
• The next German auction will be E1bln of the 2.10% Apr-29 Green Bobl (ISIN: DE000BU35025) alongside E500mln of the 2.30% Feb-33 Green Bund (ISIN: DE000BU3Z005) on June 17, while a new Aug-35 Bund will be launched on July 2, for E5.0bln.
• Timing: Results will be available shortly after the bidding window closes at 10:30GMT / 11:30CET.

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