Mizuho: Pay 10y EUR/USD Cross-Currency Basis

Mizuho see “an attractive tactical opportunity to enter paid positions in EUR/USD cross-currency basis following the regional bank-related risk-off spillover effect that started in March. The 10-Year basis has moved from the -22bp area to -30bp, which is near the 2022 lows and, more importantly, a multi-year key support. The move was further exacerbated by a large amount of EUR issuance from U.S. names this past week. We think the widening seen in this space is overdone and has left us with a good tactical opportunity to enter paid positions. More downside is possible, but we think that the 10-Year+ part of the EUR/USD X-CCY curve should prove more resilient to negative headlines.”

• We suggest entering around current levels (-30bp), with a tight stop-loss around -32bp and a take-profit around -25bp.
• These are the reasons why we think a tactical paying position could provide good performance in the next few weeks:
• A supportive issuance backdrop - expect more Yankees from European issuers.
• Risk-off swings to weigh more in shorter tenors and very U.S.-centric.
• May’s seasonality favours tightening positions.
• Strategic call for 2023 is still for a lower dollar premium and a tighter EUR/USD basis.