FINANCIALS: MAPFRE - Fitch moves to positive outlook

News of the formation of a Belgian government late on Friday provided OLOs with some insulation during Monday’s early EGB spread widening vs. Bunds, with the tightening move then developing further as U.S. tariff risks shifted.

• 10-Year OLOs are now ~2bp tighter vs. Bunds since Friday’s close and ~1bp tighter vs. DSLs over the same horizon.
• This comes after the spread to DSLs registered the widest close since ’19 on Friday.
• The spread tightening may extend further if the newly established coalition government holds up, given reduced political risk, at least in the near-term.
• Positioning is another supportive factor here, with OLOs a preferred short across many sell-side RV EGB recommendations (vs. both semi-core peers and peripheral paper).
• While Belgium’s medium-term fiscal challenges remain intact, the introduction of a new government may also prove to be enough to fend off negative rating action from Fitch (update due after hours on Friday, current rating: AA-; Outlook Negative).
• Fitch is likely to maintain its negative outlook on Belgium (assuming AA- status is affirmed) given the country’s longer run fiscal challenges and ongoing (albeit reduced) political risk.

Fig. 1: 10-Year OLO/Bund & OLO/DSL Spreads

Source: MNI - Market News/Bloomberg

• GBP1062.500mln had been on offer.
• This leaves GBP9.562bln of the gilt in issue.

Open interest data points to fresh net long setting in gilt futures across each of the last 4 sessions, with a ~23K increase in contract OI (~2.4% of OI as of last Tuesday’s close) seen as the contract rallied by 110 ticks.

• This positioning may have factored into this morning’s weakness in the contract, particularly if the long setting was dominated by short-term accounts.