EGBS: Spreads A Touch Tighter To Bunds, OATs Set For Tightest Close Since July
Mar-12 08:34
EGBS: Adjustments to an apparent moderation in U.S.-Canada trade tensions and the presence of this morning’s 10-Year German supply leaves EGB spreads to Bunds 0.5-1.5bp tighter.
- The recent theme of spread tightening has largely been a function of the shift in expectations surrounding the German fiscal situation, while other nations are generally expected to lean more on taxes/EU funding vehicles when it comes to financing increases in their defence expenditure.
- 10-Year OAT/Bunds has pushed below 70bp for the first time since September in recent days, although the moves below that level haven’t been particularly forceful, last 68.6bp. Current levels would represent the lowest close in the spread since July.
- 10-Year BTP/Bunds hasn’t managed a clean break back below 110bp, with cycle closing lows located at 105.4bp.
- PGBs lag peripheral peers at the margin after the expected ousting of the Portuguese government and with 10- & 13-Year paper set to be auctioned this morning. The German fiscal outlook and sound Portuguese fundamentals continue to limit widening episodes vs. Bunds.
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GILTS: Flat Start, Issuance & BoE Speak Due Tuesday, Little Scheduled Today
Feb-10 08:31
A flat start for gilts, futures last +3 at 93.23 (93.13-32 range).
- The short-term bullish cycle in the contract extended last week, initial support and resistance located at 92.50 & 94.35, respectively.
- Yields 0.5-1bp higher across the curve.
- 2s10s and 5s30s ~2.5bp and ~5bp off respective ‘25 closing highs.
- Goldman Sachs note that “gilts have continued to rally since the sharp sell-off in early January and are the best performer of the last few weeks. The extent of rally may mean gilts take a breather in the short run; however, we continue to expect a decline in Gilt risk premium over the coming year, and continue to recommend 10s30s flatteners.”
- Little of note on the UK calendar today, with comments from BoE Governor Bailey & MPC member Mann (after her dovish pivot) eyed on Tuesday.
- This week’s DMO issuance comes via a syndication of the new 4.50% Mar-35 gilt (we expect this to price tomorrow, pencilling in a size of GBP8.5-10.0bln) and GBP1bln of the 0.625% Mar-45 I/L line (Wednesday).
STIR: Latest Tariff Threats Keep Pressure On EUR Implied Rates
Feb-10 08:20
ECB-dated OIS have held onto the dovish repricing seen into Friday’s close, with US President Trump’s weekend tariff threats on steel/aluminium imports keeping the pressure on EUR implied rates. 87bps of ECB easing are priced through year-end at typing.
- OIS continue to fully price a 25bp cut in March, with 19bps of sequential cuts priced through the April and June decisions. 25bp cuts at the next three gatherings would bring the deposit rate to 2.00%, in the middle of the ECB’s heavily caveated 1.75-2.25% neutral range.
- In a podcast with Bloomberg released Friday, ECB Chief Economist Lane described neutral as a “hypothetical conjecture”, as it assumes a shock-free economy. In Lane’s words: “What's the probability the world won't face any more shocks in the next year?”.
- Euribor futures are -0.5 to +1.5 ticks through the blues, with a light flattening bias seen.
- The February Sentix survey is due at 0930GMT, but isn’t usually a market mover. That leaves focus on ECB President Lagarde’s appearance at the EU Parliament at 1400GMT.
| Meeting Date | ESTR ECB-Dated OIS (%) | Difference Vs. Current Effective ESTR Rate (bp) |
| Mar-25 | 2.418 | -24.8 |
| Apr-25 | 2.232 | -43.3 |
| Jun-25 | 2.043 | -62.2 |
| Jul-25 | 1.960 | -70.5 |
| Sep-25 | 1.872 | -79.3 |
| Oct-25 | 1.849 | -81.6 |
| Dec-25 | 1.804 | -86.1 |
| Feb-26 | 1.801 | -86.4 |
| Source: MNI/Bloomberg. | ||
BUNDS: /SWAPS: Long End ASWs Remain Under Pressure
Feb-10 08:12
The long end of the ASW spread curve continues to trade heavily, both in relative terms against Schatz and outright.
- Buxl ASW vs. 3-month Euribor registered a fresh cycle closing low on Friday, with increased free float and German issuance/fiscal risks continuing to weigh.
- These fundamental sources of pressure mean that relief episodes in long swap spreads remains contained, even when bonds manage to rally in outright trade.
- Meanwhile, repo/collateral dynamics have seemingly been binding in the front end of the ASW curve, preventing Schatz spread tightening towards ’24 lows.
- Still, J.P.Morgan go against the trend and recommend a tactical Bund swap spread paid position against the Schatz equivalent, given what they deem to be “attractive valuations.” They also suggest that their “2s/10s German cash bond curve flattening bias is also supportive of a steeper swap spread curve.”
