EMISSIONS: What to Watch Next Week: EU, UK ETS Auction

10-year EGB spreads to Bunds have been relatively resilient in the face of increased European defence spending prospects over the past week. Widening pressures have been limited by the German-centric nature of headline flow and prospects for joint-EU funding programmes, which should limit issuance burdens at the sovereign level.

• Spreads have narrowed intraday amid a recovery in European equities and pullback in Bund futures, after the German Green party signalled hopes for a defence spending deal by the end of this week.
• BTPs outperform, with spreads to Bunds ~2.5bps tighter at ~110.5bps. Note that the spread mechanically widened at the end of February owing to a BBG benchmark roll.
• The Italian Government has not fully embraced the prospect of increased borrowing to fund defence spending. This is somewhat unsurprising given Italy is subject to an EU Excessive Deficit Procedure, and so would not want to hamper last year's fiscal consolidation progress.
• Last week, the Government reported a preliminary 2024 budget deficit to GDP ratio of 3.4% - lower than analyst and European Commission projections. Full Q4 2024  (and FY 2024) fiscal data is due on April 4th.
• Bloomberg reported yesterday evening that Italy plans to propose a vehicle that would leverage E16.7bln of public money into E200bln in private investment for strategic defense and aerospace projects. Such a vehicle would thus limit domestic fiscal (and issuance) burdens.
• Meanwhile, last week foreign minister Tajani said that Italy would not use the E150bln of cohesion funds earmarked in the EU’s recent announcement for defence spending - instead wanting to allocate such funds "elsewhere".

Source: Bloomberg

Further to our previous Tsy bullet, J.P.Morgan have noted that “the magnitude of Monday’s rally could have been exacerbated by the low level of liquidity, as market depth declined to near its lowest levels this year.”

• Their market depth monitor assesses immediate market depth across 2-, 5-, 10- & 30-Year cash benchmarks at 08:30-10:30 NY on a daily basis.