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EGBS: /SWAPS: Commerzbank Maintain Long End Swap Spread Tightener Call

EGBS
EurozoneBulletGlobalFixed Income BulletsRegionMarkets

Commerzbank write “swap spreads and term repos continue to cheapen, raising concerns regarding the ceiling of sovereign collateral vs. ECB deposits as unbounded public debt meets constrained private sector balance sheets.”

  • They go on to suggest that “Banks hold the key given their unique access to the ECB and as leverage providers to hedge funds, whose leveraged long bond position across EGBs and SSAs has been instrumental in underwriting rising ECB-adjusted net issuance.”
  • They “turn to U.S. Treasuries to evaluate the impact of balance sheet bottlenecks and compare the sovereign positioning of hedge funds. We calculate an intermediation fee of 5 to 10bp for UST repos. Combined with well-behaved spot repos this is hardly disruptive even allowing for 'special' European factors.”
  • They conclude with “this argues against an unbounded cheapening of € spot repos and Schatz-spreads. (Ultra-)long Bunds are lacking an anchor though and stay most exposed to a catch-up with USTs. We stay short and affirm our tightening targets incl. 0bp for 10y Bunds vs. 6m Euribor.”
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Commerzbank write “swap spreads and term repos continue to cheapen, raising concerns regarding the ceiling of sovereign collateral vs. ECB deposits as unbounded public debt meets constrained private sector balance sheets.”

  • They go on to suggest that “Banks hold the key given their unique access to the ECB and as leverage providers to hedge funds, whose leveraged long bond position across EGBs and SSAs has been instrumental in underwriting rising ECB-adjusted net issuance.”
  • They “turn to U.S. Treasuries to evaluate the impact of balance sheet bottlenecks and compare the sovereign positioning of hedge funds. We calculate an intermediation fee of 5 to 10bp for UST repos. Combined with well-behaved spot repos this is hardly disruptive even allowing for 'special' European factors.”
  • They conclude with “this argues against an unbounded cheapening of € spot repos and Schatz-spreads. (Ultra-)long Bunds are lacking an anchor though and stay most exposed to a catch-up with USTs. We stay short and affirm our tightening targets incl. 0bp for 10y Bunds vs. 6m Euribor.”