EU Feb43 : attractive entry level

Since UK CPI and FOMC’s minutes, investors have been repricing Fed and ECB scenarios, triggering a bear flattening move on € curves. EU bonds have underperformed in the AAA space like Netherlands and against France, whose curve benefits from prime liquidity even on the long end maturities. Today’s EU is expected to offer up to 2.5bn€ of its green 20-year 1.25% February 43 (EU000A3K4DG1 - NGEU series) with some attractive features. First, as a AAA issuer, the recent sell-off in € curves offers nice opportunities to enter a green credit risk-free paper , with a possible EU inclusion in Sovereign indices as one of the most significant tailwinds going forward. We estimate the (unfunded) carry roll-down for this Feb43 around 46 bps for a 3-month horizon . With a negative supply week (-46bn€), trading technicals could be supportive. Second , on asset swap terms, the bond trades on the high-end of its recent range against neighboring bonds (2042 or 2044). In early April, EU Feb 43 was trading -16bps lower than non-green EU Nov42. It is now trading back to -11.4 bps. The cheapening of th is bond in its curve is most evident through a butterfly with Nov42 and Apr44, where Feb43 is back to the top of its recent range at -10bps when it traded close to -18bp in the middle of May.