BUNDS: /SWAPS: Defence Spending Risks Bearish For Long End Swap Spreads
{GE} BUNDS/SWAPS: German ASWs vs. 3-month Euribor are tighter but trade within 0.5bp of yesterday’s closing levels after debt issuance risks surrounding increased defence spending helped counter the (initially U.S. swap spread-driven) widening seen late last week.
- The Buxl ASW is the only spread which hasn’t fully retraced last week’s move.
- We have suggested that fundamentals point to continued tightening pressure in long end ASW spreads in the medium-term and increased defence spending would add further weight to this idea, as does the potential for debt brake reform.
- More broadly, Commerzbank play down the likelihood any fundamental regulatory shifts within EUR markets, noting note that “while ECB heavyweights are now actively calling for regulatory relief, we doubt that the Leverage Ratio is the binding constraint for € repo intermediation considering GC/specialness dynamics during the past 15 months.”
- As a result, Commerzbank reaffirm their view that “recoveries in (ultra-)long Bund spreads should be used to add to structural shorts.”
Fig. 1: German ASW Spreads (Vs. 3-Month Euribor)
Source: MNI - Market News/Bloomberg
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EGBS: Spreads Within 0.5bps Of Friday's Levels
10-year EGB spreads to Bunds are within 0.5bps of Friday’s closing levels, with GGBs modestly outperforming.
- The OAT/Bund spread remains at 78bps, following last week’s general policy address and unsuccessful censure motion against the Bayrou government.
- PM Bayrou’s survival has removed some short-term political uncertainty, allowing a little risk premium to be priced out of OATs (the spread reached a closing high of 84bps last Monday).
- However, medium-term political and fiscal risks remain prevalent in France and the passing of a budget (touted for the end of January) is the next hurdle for Bayrou.
- The BTP/Bund spread is currently 111bps. Last week’s softer-than-expected US CPI drove a pullback in year-end ECB implied rates and a renewed rally in European equities, helping the spread fully unwind its early-January widening.
- A reminder that MNI looks for syndications from Austria, Finland and Spain this week. Books are already open for today’s dual-trance 3/10-year EFSF transaction.
BONDS: Non-committal Trade Thus Far
Skittish early Monday trade, with EGBs digesting familiar rhetoric from the hawkish wing of the ECB (Schnabel & Holzmann), while looking ahead to Trump’s inauguration.
- German & UK yields within 1bp of Friday’s close across the curve.
- The observance of the MLK holiday in the U.S. means that cash Tsys are closed until Asia hours.
FOREX: FX OPTION EXPIRY
Of note:
EURUSD 1.4bn at 1.0300/1.0325.
EURUSD 2.5bn at 1.0300/1.0325 (tue).
USDJPY 1.3bn at 156.00 (tue).
AUDUSD 1.69bn at 0.6210 (wed).
EURUSD 3.24bn at 1.0295/1.0320 (thu).
- EURUSD: 1.0300 (1.02bn), 1.0325 (475mln).
- AUDUSD: 0.6185 (550mln).
- NZDUSD: 0.5660 (329mln).
- USDZAR: 18.7000 (300mln).
