Investment banks and German mortgage banks piled into the euro interest-rate receiver swaps market last week on expectations the European Central Bank would follow the Federal Reserve in cutting interest-rates and in anticipation of a EUR5 billion (USD 4.3 billion) five-year bond KfW will issue this month. The typical notional size of the trades was EUR50-100 million with a total of approximately EUR3 billion going through the brokered market on Thursday, twice the normal volumes.
KfW typically converts bond issues to synthetic floaters via the swaps market, so traders last week were positioning themselves accordingly by paying floating and receiving fixed in five-year deals. Goldman Sachs, Morgan Stanley and Dresdner Kleinwort Wasserstein are mostly likely to win the KfW mandate as they are lead managing the bond, according to swap traders.
German mortgage banks were the main buyers of one- to three-year interest rate swaps. One Frankfurt based trader said the banks are opting to receive fixed and pay floating in the swaps because they expect the ECB to cut rates. The mortgage banks are continually issuing debt, which they swap into floating when they think they can reduce their all-in cost of funds.
