###POV. EUR 10Y SWAP RATE LOSES CONTACT WITH...>

EGBS: ###POV. EUR 10Y SWAP RATE LOSES CONTACT WITH THE CURVE'S FRONT END

- We have a favourite chart that links the EUR 10Y swap rate to a regression of

the 5th and 9th forward Euribor contracts. To use jargon, it has a strong

co-integrating relationship. It is not necessary to see this chart but what's

clear from this relationship is that in November, the EUR 10Y swap rate fell

when the euribor strip suggested it should have been stable. Some might describe

it as a decline in the term risk premium. Perhaps this is consistent with low

implied vols and/or supply drying up while the ECB continues to buy strongly.

- Will the term premium decline last? January is often a time of changed

fortunes for markets. And, we are well aware that the ECB slows its asset

purchase program to E30bln at the same time as there is likely an explosion of

issuance. In January 2017, EGB issuers sold 739k of 10Y Bund contract equivalent

of bonds, 25% more than in the next most intensive month for duration.

- Our best guess is that the EUR 10Y swap struggles to stay so low.

- Yet, one fresh uncertainty for January 2018 is whether Mifid II confusion

might slow the flow of syndicated deals as investors and banks are distracted.