EUR swap spreads Challenges to cheapening

Research evidence excerpt

EUR swap spreads Challenges to cheapening

29 June 2026

Fixed Income

RatesEUR swap spreads

Challenges to cheapening Eurozone

◆ Bund spreads have been remarkably stable in the last 18m, Chris Attfield

and now look rich to our model European Rates Strategist HSBC Bank plc

chris.attfield@hsbcib.com

◆ Valuations have cheapened to the pre-QE levels seen in +44 20 7991 2133

2014, but the rebound in March was short-lived

◆ We see cheapening pressures from continued net supply,

rich valuations and political risks in 2027

A holding pattern

In Bund spreads in 2026 (27 November 2025) we looked for Bund spreads to resume

cheapening. Halfway through the year, and we’re still waiting. 10Y Bund-swap

spreads have been remarkably stable over the last 18 months and remain at their

average level of -18bp1, despite last year’s German fiscal package and US tariff

shocks and this year’s conflict in the Middle East.

In the light of this, we update our model and question its assumptions. We now see

Bund spreads as rich – but not significantly so, although they will be if they remain at

these levels by the end of the year. Directionality is still not a significant factor, and

the richening at the start of the conflict in March proved transient. The biggest

challenge is that valuations are back at pre-QE levels: there may be a regime shift

where spreads become less sensitive to the expansion in the free float of Bunds

which was associated with spread cheapening in 2023-24. However, history suggests

that spreads have periods of stability punctuated by larger moves.

Bund spreads are highly correlated across the curve. 2Y spreads were more volatile

in the 2022-25 rate cycle, possibly because 2Y swaps are more sensitive to rate

expectations.