- Buy March Bund asset swap spread future
- Open ½ position at 19.4bp, open next ½ position at 10bp (avg. entry of 14.7bp)
- Target at 40bp, stop at 0bp
- Indicative carry and roll around +1bp over the first six months Long Bund ASW spread is attractive risk-off hedge
The Bund asset swap spread has tightened significantly over the past couple of months. Currently the future trades close to +20bp. This is the lowest level since early 2011 and we have to go back to early 2010 to find levels that are meaningfully lower.
The tightening of the bund swap spread has been driven by a cocktail of money market basis tightening, the low level of interest rates, declining volatility (which reflects recent aggressive central bank actions) and a bout of corporate issuance activity. Last but not least, the significant tightening of peripheral bond spreads has supported the tightening in the bund asset swap spread.
Although the current level is rather tight, a further tightening is not unlikely, given that we are at the beginning of the year and issuance activity is usually quite high at this time. Hence, we are only opening a ½ position at the current level and keep room for a further tightening to 9bp before entering the remaining ½ position.
From a portfolio perspective we think that this trade offers an attractive hedge for investors who are positioned for higher long-end rates in the core markets or further tightening of European peripheral spreads to Germany. In a risk-off scenario, which could be triggered either by renewed turmoil relating to the euro crisis or the upcoming debt ceiling negotiations in the US, we would expect the Bund spread to widen. The carry and roll-down for the position is marginally positive on a three and six-month horizon.
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