Commerzbank: Collateral Abundance, Stay Short ASWs

Commerzbank write “DFA cut Q4 bond issuance by €8bn and BuBills by €23bn. Neither the size nor the distribution of the cuts constitutes a surprise as we had pencilled in €25bn with risks skewed towards larger cuts, and almost the entire overshooting is due to BuBills (we expected €7bn in bonds).”

• “For swap spreads, this is neutral in our view as a BuBill-driven collateral spiral seems unlikely. BuBills best sum up the massive collateral regime change: DFA has cut H2 BuBill issuance by a whopping €33bn (€23bn Q4, €10bn Q3), and the Bundesbank has cut the deposit remuneration to 0% amid remaining domestic public deposits of ~€40bn. Yet, BuBill spreads vs. €STR are trading on the cheapest level in more than a year at around €STR-20bp.”
• “As argued before, the decline in global collateral demand seems crucial for this regime change, i.e. the lack of collateral demand from leveraged accounts and IRS books in need to balance mark-to-market losses at their respective counterparts/clearers (i.e. daily margining).”
• “This is also clearly visible in the very tame ASW-widening during the latest bearish risk-off in spreads/equities, as it was precisely the joint losses across all asset classes which fuelled the collateral scarcity and repo/BuBill/ASW-richening last October, culminating in the DFA’s ad-hoc taps.”
• “Against this background, forward specialness as embedded in Schatz-spreads seems too high.”
• “Moreover, we struggle to identify a trigger for notable re-widening over coming months, which simply for the carry renders Schatz-tightener attractive. So stay short”