BONDS: SWAPS: Notable Divergence In U.S. & German Long End Swap Spreads
While both the U.S. & German 30-Year swap spreads remain deep in negative territory, divergence between the two witnessed over the past couple of sessions is notable.
- We have previously covered the drivers in play in both markets, summarised below:
- In the U.S., the lack of movement in the Treasury’s forward guidance surrounding its coupon issuance and comments from Fed Governor Bowman (a top candidate to replace Vice Chair for regulation Barr), pointing to the potential for a reduction in balance sheet restrictions for dealers, have been at the fore. Bowman will speak again later, once again covering the topic of bank regulation, as well as the economy.
- Meanwhile, the increased free float and fiscal/issuance risks continue to weigh on the long end of the German swap spread curve.
- Commerzbank write “it is remarkable how little Bunds were able to benefit from the regulatory hopes sweeping through U.S. Treasuries.”
- They also play down the likelihood of similar European regulatory action, which leaves the fundamental backdrop outlined above at the fore and helps explain the divergence.
Fig. 1: U.S. 30-Year Swap Spread & German Buxl ASW vs. 3-Month Euribor (bp)
Source: MNI - Market News/Bloomberg
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US: Review Of President-Elect Donald Trump's Mar-a-Lago Press Conference
US President-elect Donald Trump delivered a wide-ranging press conference at his Mar-a-Lago resort in Florida on January 7, touching on various issues from energy to his foreign policy ambition of carving out a new US sphere of influence from Panama to Greenland.
- Please find below a full summary of the presser with analysis of the key comments related to foreign policy, tariffs, energy, and legislation.
Full article: Trump Press Conference Review
GILTS: Long Futures Positioning A Potential Factor In Sell Off
Elsewhere, a reminder that our latest positioning indicator update (published yesterday) pointed to long positioning in gilt futures. That could be adding further fuel to the sell off.
GILTS: Further Selling
Further weakness in gilts accompanies pressure for GBP in FX trade, with the market in price discovery mode after finding fresh multi-decade highs in 30-Year yields and registering the highest level seen since ’23 in 10-year yields.
- Yields now 2.5-5.0bp higher across the curve, while futures trade as low as 90.75.
- Technicals for 10s & futures outlined in the prior post.
- No fresh UK headline triggers, but continued erosion of already limited fiscal headroom adds to wider pressure stemming from a reassessment of global term premium, hawkish U.S. data and a heavy start to ’25 IG supply, as well as medium-term structural headwinds for gilts.
- SONIA futures +0.5 to -9.0. Dec low in SFIZ5 untested. Nov low in SFIZ6 broken.
