Commerzbank Weigh In On Schatz ASW Matters

Commerzbank note that their “analysis of the DFA's structural collateral provision suggests that more than just "Bundesbank carry" (approximately the spread of the 10 most special German ISINs vs. Bundesbank remuneration) is at play (for ASW-premiums), arguing for steady collateral supply rather than scarcity.”

• “Lower net issuance in Q3/Q4 is on the cards though. Besides lower expenditures for the Economic Stabilization Fund, which will probably not be needed in full given the positive development of energy prices, parking excess issuance at the Bundesbank has become costly. In addition, it is not clear whether the capacity of reverse repos would be sufficiently large and available in dynamic market environments.”
• “Collateral scarcity concerns appear overdone. Combined with the latest ASW-decoupling from the slide in implied vols to 11-month lows - the other key factor in our structural fair value model - this is leaving Schatz-ASW valuations at very ambitious levels: the model-implied Schatz-spread is at the lowest level in almost a year and the model residual is close to the all-time highs from last year's scarcity hype.”
• “Back then Schatz-spreads did not command a safety premium and overshooting on risk-off constitutes the major risk for ASW-shorts. For now, we reiterate our cautious tactical stance on Schatz-spreads but recommend using widening episodes above 90bp (invoice spread vs. 6m Euribor, corresponding to 65bp vs. €STR) to resume strategic tighteners.”