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MNI BRIEF: Investors Increasingly Eyeing Fiscal Policy -ECB VP

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TD Securities: EURUSD Basis Remains Strained

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TD Securities note that “quarter-end has not come with much relief for basis. The move in EUR basis has also been weighing on the £/$ front-end. Though the moves have desynchronised in the long end of the £/$ curve.”

  • They outline several drivers:
  • “Italy's fiscal trajectory has again gained focus, as the ECB's policy focus shifts from policy rates to the balance sheet. The move in sovereign spreads has been slowly and steadily making its way to EUR ITRAX credit space.”
  • “One of the key themes since end-September has been the richening of EUR ASW vs. GBP/USD. Dynamics are primarily driven by the widening move in IBOR-ESTR spreads. We do not sense any scarcity of collateral driving the move.”
  • “The ECB's fine-tuning of its liquidity measures or tweaks to PEPP have also been tightening credit sentiment. Note that banks this week used the ECB's MRO facility again.”
  • “Unlike the GBP SSA space, EUR has not seen much USD issuance to support a move tighter in basis.”
  • “We still believe that the ECB has always prioritized financial conditions, and these moves are not going unnoticed by the GC. That said, the global move in rates will weigh on EUR rates. We therefore continue to favour a long bias in front-end EUR swap spreads. Supportive EUR cashflow supports our bias.”
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TD Securities note that “quarter-end has not come with much relief for basis. The move in EUR basis has also been weighing on the £/$ front-end. Though the moves have desynchronised in the long end of the £/$ curve.”

  • They outline several drivers:
  • “Italy's fiscal trajectory has again gained focus, as the ECB's policy focus shifts from policy rates to the balance sheet. The move in sovereign spreads has been slowly and steadily making its way to EUR ITRAX credit space.”
  • “One of the key themes since end-September has been the richening of EUR ASW vs. GBP/USD. Dynamics are primarily driven by the widening move in IBOR-ESTR spreads. We do not sense any scarcity of collateral driving the move.”
  • “The ECB's fine-tuning of its liquidity measures or tweaks to PEPP have also been tightening credit sentiment. Note that banks this week used the ECB's MRO facility again.”
  • “Unlike the GBP SSA space, EUR has not seen much USD issuance to support a move tighter in basis.”
  • “We still believe that the ECB has always prioritized financial conditions, and these moves are not going unnoticed by the GC. That said, the global move in rates will weigh on EUR rates. We therefore continue to favour a long bias in front-end EUR swap spreads. Supportive EUR cashflow supports our bias.”