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BUNDS: /SWAPS: New Closing Low In Bund ASW Nears, Long End Narrowing Intact

BUNDS
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Recoveries in the long end of the German ASW curve remain limited.

  • Bund vs. 3-month Euribor ASW is set to register a fresh closing low, while the Buxl equivalent approaches its own cycle/all-time low.
  • Although the heaviest burst of EGB supply pressure is now seemingly behind us, increasing free float and reduced liquidity in the Eurozone area (both coming as a result of the ECB’s balance sheet preferences) continue to weigh on spreads.
  • Repo markets continue to operate in an orderly manner, further explaining the long end-driven nature of the spread narrowing seen since early December.
  • We (and several sell-side desks) had pointed to the potential for long end swap spread-driven narrowing from early to mid-December.
  • Looking forwards, the presence of range extremes and concentrated positioning may exacerbate any widening episodes (if they manage to become a little more established), although the fundamental backdrop outlined above should limit rallies in long end ASWs.

Fig. 1: German ASWs (Vs. 3-Month Euribor)

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Recoveries in the long end of the German ASW curve remain limited.

  • Bund vs. 3-month Euribor ASW is set to register a fresh closing low, while the Buxl equivalent approaches its own cycle/all-time low.
  • Although the heaviest burst of EGB supply pressure is now seemingly behind us, increasing free float and reduced liquidity in the Eurozone area (both coming as a result of the ECB’s balance sheet preferences) continue to weigh on spreads.
  • Repo markets continue to operate in an orderly manner, further explaining the long end-driven nature of the spread narrowing seen since early December.
  • We (and several sell-side desks) had pointed to the potential for long end swap spread-driven narrowing from early to mid-December.
  • Looking forwards, the presence of range extremes and concentrated positioning may exacerbate any widening episodes (if they manage to become a little more established), although the fundamental backdrop outlined above should limit rallies in long end ASWs.

Fig. 1: German ASWs (Vs. 3-Month Euribor)

Keep reading...Show less