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According to Benoit Gerard, a strategist at the French lender, that in turn should further narrow the gap between the rate on German interest-rate swaps “- which incorporate an element of counterparty risk “- and the yield on equivalent bonds, among the region’s safest assets.

The difference between the two, known as the swap spread, has shrunk since mid-2022, falling to the lowest the lowest in almost three years. So far, most of the repricing has come as the ECB trimmed its holdings of highly-sought German bonds, pushing yields higher relative to swaps.

“Current levels on Schatz, Bund swap spreads could now act as a ceiling and not a floor,” he said. “This is positive for risk.”

German swap spreads in the 10-year tenor tightened from over 100 basis points in mid-2022 to 30 basis points, the lowest in almost three years.