ASIA: Little In The Way Of Concrete Responses To US Tariffs So Far

• Books in excess of E9bln
• Initial spread guidance for the new 10-year 2.50% Jul-35 DSL at +25.0 to +28.0bps vs the 2.50% Feb-35 Bund (ISIN: DE000BU2Z049).
• (ISIN: NL0015002F72)

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The potential EUR800bln increase in EU defence spending touted by European Commission President Von Der Leyen is probably more sizeable than expected, given our policy team's report pointing to ~EUR100bln joint funding instrument (Von Der Leyen pointed to ~EUR150bln for the size of that instrument) and rumoured EUR400bln in German defence spending that could be funded via a special fund.

• To quantify that figure, EU defence spending sat at €326bln during ’24.
• The size, speed and horizon of any spending increase will be key for markets, with EGB long ends already sensitive to increased issuance risk (as evidenced by Monday’s price action).
• Reaction to Von Der Leyen’s comments from across the EU now eyed.
• Initial market reaction sees Bonds tick lower, Euro Stoxx futures off lows and EUR/USD to fresh session highs.
• Note that EUR/USD remains below the Jan 27 high and reversal trigger (1.0533), with highs of 1.0524 seen thus far.
• German curve steeper, but a more muted reaction in German ASWs.
• EU-bonds also showing little sign of underperformance via spreads, seemingly given the wide gap between the joint funding instrument and touted potential total expenditure, which would put more pressure on individual states to provide defence funding increases.