BONDS: SWAPS: Notable Divergence In U.S. & German Long End Swap Spreads

While both the U.S. & German 30-Year swap spreads remain deep in negative territory, divergence between the two witnessed over the past couple of sessions is notable.

• We have previously covered the drivers in play in both markets, summarised below:
• In the U.S., the lack of movement in the Treasury’s forward guidance surrounding its coupon issuance and comments from Fed Governor Bowman (a top candidate to replace Vice Chair for regulation Barr), pointing to the potential for a reduction in balance sheet restrictions for dealers, have been at the fore. Bowman will speak again later, once again covering the topic of bank regulation, as well as the economy.
• Meanwhile, the increased free float and fiscal/issuance risks continue to weigh on the long end of the German swap spread curve.
• Commerzbank write “it is remarkable how little Bunds were able to benefit from the regulatory hopes sweeping through U.S. Treasuries.”
• They also play down the likelihood of similar European regulatory action, which leaves the fundamental backdrop outlined above at the fore and helps explain the divergence.

Fig. 1: U.S. 30-Year Swap Spread & German Buxl ASW vs. 3-Month Euribor (bp)