Commerzbank On The Recent EURIBOR/€STR Widening

Commerzbank note that “upside pressure in Euribor-€STR spreads is gaining traction as the ECB rate cut draws nearer.”

• “This mechanical effect has frequently been observed in the run-up to initial ECB rate cuts.”
• “Tradable OIS rates move instantly with ECB rate expectations and 3M swaps are falling in a scenario of steady expectations of quarterly rate cuts of 25bp.”
• “The speculation about a July follow-up rate cut also helped (almost 20% probability discounted) but could see a setback today on Schnabel’s comments.”
• “Euribor fixings, on the other hand, often show inertia, with panel banks being slow to adjust their deposit pricing to account for prospective unconfirmed ECB rate changes.”
• “Since last week we even saw a small increase in fixings after the swifter decline in recent weeks.”
• “As a result, the trend decline in OIS rates is larger and the spread widens.”
• “Another factor that could move into sight before long is the 35bp reduction in the MRO/LTRO allotment rate starting in September, which could potentially lead to sizable regulatory-driven demand by banks over year-end.”
• “In his speech yesterday, Bundesbank President Nagel also indicated that he thinks a 15bp spread over the depo rate could be on the generous side, encouraging banks to use ECB operations as a collateral upgrade facility.”