HALISTER1: U.S.-German 10Y Convergence, 2y Swap Wideners Backed by Barclays

U.S.-German 10Y Convergence, 2y Swap Wideners Backed by Barclays

(Bloomberg) -- USTs have “limited room” to underperform other safe-haven debt, and USD swap spread widening should continue, especially at short end, Barclays strategists led by Rajiv Setia say in April 21 note.
  • Barclays continues to recommend U.S.-German 10Y convergence trade, outright and conditionally (via selling ATM+~40bp 2y*5y payers, buying EUR 2y*5y payers)
    • Growth rates are “gradually converging” and inflation remains below target in both regions
  • Drivers of USD swap spread widening over past few weeks include:
    • Lighter dealer net inventories of USTs, easing balance sheet constraints
    • Positive carry, especially at front end
    • At longer end, rate selloff and risk-asset gains curb likelihood of receiving from insurance companies, and could even lead to unwinding of existing receive-fixed hedges
  • Recommend being long 2y swap spreads, remaining neutral on long-end spreads because of balance-sheet constraints and potential for a risk-off event to create receiving need
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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Rajiv Setia (Barclays PLC)

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