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SocGen see 3 drivers for wider European swap spreads

MARKET INSIGHT
  • "Repo rates are falling vs unsecured cash due to a shortage of collateral, driven by three forces: 1/ ECB policy (asset purchases, TLTROs); 2/ Increasing structural demand for HQLA; and 3/ current temporary factors (year-end, market volatility, market infrastructure changes)."
  • "The non-homogenous rules applied by NCBs make the Eurosystem's securities lending vs cash a suboptimal backstop against major repo market tensions. As a result, we believe, the ECB may not prevent year-end tensions but should eventually stabilise repo market conditions in 2022 or even marginally ease them."
  • "Using 2016 and 2018 as a template, we could see a 5/10bp narrowing in the ESTR/repo over the next year. This would drive the Schatz vs ESTR spread into a 20/25bp range, all other things being equal."
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