PORTUGAL AUCTION PREVIEW: On offer next week

In amongst various tariff announcements seen over the past week, US mortgage holders took the opportunity to refinance at modestly lower rates in the week to Apr 4. That’s unlikely to last though with 10Y swap rates currently 30bp higher than where they ended last week (or 16bp higher than last week’s average). 

• MBA composite applications increased 20% over the week (sa) to end three weeks of chipping away at a prior cumulative 34% jump seen in late Feb/early Mar when rates first pulled lower.
• New purchase applications increased 9.2% whilst refis jumped 35%.
• The 30Y conforming rate fell 9bps to 6.61% for its lowest since Oct 2024, continuing a decline from a recent high of 7.09% in Jan.
• It, for now, saw new purchase applications at the highest since Jan 2024 (67% of 2019 average) whilst refis are at their highest since Oct 2024 (55% of 2019 average).  
• 10Y swap rates are currently 30bp higher than where they ended last week (or 16bp higher than last week’s average) and mortgage rate spreads to swap rates have widened by about 30bps over the past month. 

Tsy Sec Bessent to Fox Business on China: "They can raise their tariffs, but so what?"

• Re back-and-forth reciprocal tariff impact: "The proportionality for the Chinese will be much worse."
• At a point in the not too distant future, Bessent says, the US economy will be back to "firing on all cylinders".
• Says "China's surrounded" by countries willing to negotiate with the US. But says re headlines of Spain negotiating with China is a "losing proposition for the Europeans". Says part of the discussion "as our allies come, [is] how to get China to rebalance? That's the big win here".
• Bessent also hints again at an initial step to an offramp being China willing to tackle fentanyl precursor exports.
• Bessent says if China starts devaluing the currency, that's a tax on the rest of the world, and other countries will have to raise their own tariffs to offset the devaluation.
• Asked if China is dumping Tsys, Bessent says: "I think it works against their purposes if they are"
• Reiterates "the US has a strong dollar policy". Saying higher European and Japanese fiscal spending due to US-led measures are the reason for the dollar weakening bilaterally

ECB officials currently appear relaxed with the current state of Eurozone money markets and liquidity conditions. This morning, Knot noted that market functioning has been preserved, while Villeroy has not yet seen signs of liquidity issues. These comments echo yesterday’s Reuters sources piece, which noted that officials have been “reassured to see that market liquidity had not dried up”. 

• The 5-day average of the 6-month Euribor/ESTR spread hasn't displayed any material widening since last Wednesday's tariff announcement, with Monday's rise to 26.3bps (the higehst since November 22) followed by a pullback to 17.7bps yesterday. Some renewed widening may be expected in the coming sessions, with recent volatility necessitating some repricing of the credit and liquidity risks embedded in Euribor relative to ESTR.
• Meanwhile, the spread between the deposit rate and the ESTR O/N rate remains sticky between 8-9bps, suggesting the sensitivity of ESTR to changes in liquidity remains relatively muted.
• The ECB’s gradual balance sheet size run-off has seen Eurozone excess liquidity fall to ~E2.8trln, from a peak of ~E4.6trln in November 2022. This decline has mostly been well digested, but the ECB has signalled a flexible stance with respect to liquidity provisions if conditions warrant. 
• In an interview with the MNI Policy Team released on Monday, former director general of research Lucrezia Reichlin said that there is a risk the ECB will be forced to reduce the pace of its balance sheet runoff in order to safeguard the stability of the financial system in the wake of the U.S. tariff shock.
• In a similar vein, at an MNI Connect event in February, Executive Board member Cipollone said that “in an environment of heightened uncertainty, even in the context of excess liquidity, we need to remain prudent and be ready to step in should another shock emerge. We should maintain the flexibility to swiftly expand liquidity facilities if stressful conditions arise".