EGBS: Modest Spread Tightening As Equities Rally
May-08 08:32
Modest spread tightening to Bunds aided by the move higher in equities, as global trade risks ease a little (UK-U.S. trade deal advances and reports pointing to a relaxation of U.S. chip curbs).
- Moves are only modest, with the peripherals outperforming and spreads little changed to 1bp tighter on the day.
- BTP/Bunds at ~106bp, ~1bp above year-to-date closing lows.
- Vol. metrics e.g. EUR 3m10y have stabilised after retracing the bulk of the U.S. trade policy-driven surge higher seen across March and April.
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GILT AUCTION PREVIEW: 4.375% Jul-54 gilt
Apr-08 08:25
- The DMO will kick off gilt issuance for the week this morning with GBP2.25bln of the 30-year 4.375% Jul-54 gilt on offer.
- Markets have been very volatile and long-end demand has been questionable globally. Yesterday, the BOE’s medium-dated APF operation saw no bids for gilts with residual maturities between 13-20 years. Overnight there was a soft 30-year JGB auction. There will also be a long-end syndicated tap of the 2.50% Oct-52 EU-bond today. Both the EU syndication and the gilt auction will be seen as wider indications of long-end demand globally.
- Given these global concerns, there may be more of a concession than normal ahead of the end of the bidding deadline. And indeed, we are already seeing that to some extent with 10s30s steepening in gilts, but not in USTs or Bunds in the European morning session.
- However, it is hard to know how much recent auction performance will factor in - we think the general conditions today are more relevant. Recent auctions have been well received with both bid-to-covers in 2025 coming in below 3x but since September having been in a 2.75-3.08x range. Tails have ranged from 0.2bp (at the last auction) to 0.9bp in September – but outside of that one auction all tails have been between 0.2-0.4bp.
- There are no further auctions of this gilt scheduled for the quarter, and we are unsure whether the syndication in May will see a new 20-year gilt or new 30-year gilt launched. Either way, we would expect to see a new 30-year gilt via syndication shortly, so this may be the last auction of the 4.375% Jul-54 gilt as an on-the-run issue.
- Timing: Results will be available shortly after the bidding window closes at 10:00BST.
DUTCH AUCTION RESULTS: 0.50% Jul-32 DSL
Apr-08 08:15
| 0.50% Jul-32 DSL* | Previous | |
| ISIN | NL0015000RP1 | NL0015002F72 |
| Amount | E2.095bln | E1.99bln |
| Avg yield | 2.567% | 3.011% |
| Avg Price | 86.46 | 95.54 |
| Pre-auction mid | 86.412 | 95.509 |
| Previous date | 25-Mar-25 |
SWAPS: ING See Scope For Further EUR 20s30s Steepening
Apr-08 08:07
ING see scope for a continued steepening of the EUR 20s30s curve, helped by Dutch pension fund demand. In addition to demand for fixed receiver swaps (particularly 20y tenors) stemming from the transition from a defined benefits to defined contribution system in 2026, the recent sell-off in global equities and lowering in global rates has placed pressure on pension fund’s funding ratios.
- “The sell-off in equities lowers the funds’ assets, whilst lower interest rates increase liabilities”.
- “Our modelling suggests that the impact so far on the average funding ratio is around -4%, which would bring the ratio down to 114%”
- “Several large funds, including the largest ABP (€500bn+ AUM), have a lower funding ratio than the average, and thus risk seeing their funding ratio fall too close to 100% for comfort”.
- “The added headwinds and volatility therefore incentivise funds to hedge risk, either through fixed receiver swaps, equity puts or swaptions”.
- “The period leading to the transition dates could see increased demand for fixed receiver swaps, particularly in the 20y space. The 30y tenor is less attractive given that longer-dated hedges will become obsolete after transitioning to defined contributions. As such, the steepening of the 20s30s curve could run longer, helped by Dutch pension fund demand.”
