OAT: Citi Cautious On Establishing Fresh OAT Shorts At Current Levels

Citi note that “while BTP (and other EGB) spreads to Bunds have been range-bound, OAT/Bund spreads have continued to tighten”.

• They believe that the recent OAT outperformance “has been driven partly by recent comments noting that part of the defence spending could be funded via higher taxes, unlike the expectation of purely debt-funded expenditure increases elsewhere. Further, in comparison to the massive increase likely in German issuance and European deficit increases likely across the board, the French fiscal issue stands out less in the near term”.
• They also note that “the sharp increase in outright OAT yields alongside Bunds might have encouraged some demand from domestic real money, which could persist”.
• Citi remain engaged in their structural short 30-Year OATs vs. Bonos trade, but they caution that they would wait to re-enter fresh tactical OAT shorts for now.