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Long-end German ASWs have fully reversed Friday’s widening, with outright yields increasing on the prospect of increased European defence spending in the event of a US-brokered peace deal between Russia and Ukraine.

• Buxl ASW vs. 3-month Euribor is ~3bps tighter today at -39bps, after widening to a multi-week high of -34.5bps on Friday morning. Bund ASW is also 2.5bps tighter, with more modest movements seen at the short-end.
• Last week’s widening was seemingly a combination of US spread spillover and concentrated short positioning in German long-end spreads. Reduced expectations for a long-end Bund syndication ahead of the Feb 23 German election may have also played a role.
• Although we pencil in a 30-year Bund syndication for this week, our conviction is waning ahead of the election. We wouldn’t rule out a mandate announcement for today, with a transaction tomorrow, but the later in the week we go the less likely the transaction would be.
• The prospect of debt brake reform following the election result (the probability of which depends on the eventual composition of the Bundestag) presents a key near-term risk to ASWs, even if the implementation of any reforms would likely take some time. MNI’s full German election preview will be released early this week.
• On a medium/longer-term basis, fundamentals point to further tightening of ASWs, with the ECB’s balance sheet run-off increasing free-float of German paper and easing concerns around collateral availability. 

Figure 1: German ASWs

• EUR/USD: $1.0500(E3.6bln)
• USD/JPY: Y148.20($986mln), Y152.00-20($1.1bln)
• AUD/USD: $0.6285-00(A$515mln)