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Curves flatten after ECB makes more collateral available; US CPI due later

BONDS
  • There has been a bear flattening of core FI curves this morning, led by the ECB's announcement that it would increase the securities lending limit to E250bln with an ECB spokesman telling MNI the move would "support market functioning and provide an efficient backstop for the euro area repo markets in particular over the year-end." With collateral shortages most acute at the short-end, Schatz asset swap spreads have tightened over 2bp today to 76.6bp at writing (after hitting a low of 75.4bp this morning). This is notably off the 115+bp spreads we had seen in mid-October. Bund asset swap spreads have also tightened but to a smaller extent. This has led to the prices of shorter-term government debt falling and hence flattening the curve.
  • Looking ahead, the main focus of the day will be the release of US inflation data at 13:30GMT / 8:30ET. Core CPI inflation is seen slowing slightly to 0.5% M/M in October after surprise persistence at 0.58% in Sept. The analyst survey is skewed slightly lower although the Cleveland Fed Nowcast implies upside risk. A similar 0.1-0.2pt beat to last month could see a delay in the Fed’s anticipated downshift to 50bp hikes into 2023 or augur a longer string of hikes, either way pushing the terminal rate higher still and driving a sharp flattening in the Treasury curve. For the full MNI CPI Preview click here.
  • There are a large number of speakers due up today. We will hear from the Fed's Harker, Logan, Daly, Mester and George as well as the ECB's de Cos, Schnabel, Kazimir and Vasle and BOE's Ramsden.
  • TY1 futures are up 0-3+ today at 110-14 with 10y UST yields up 2.4bp at 4.112% and 2y yields up 4.3bp at 4.626%.
  • Bund futures are down -0.14 today at 138.06 with 10y Bund yields up 2.4bp at 2.191% and Schatz yields up 4.5bp at 2.146%.
  • Gilt futures are down -0.47 today at 102.84 with 10y yields up 5.0bp at 3.499% and 2y yields up 5.8bp at 3.251%.
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