Semi-core and peripheral spreads tightened further last week, with long-end Belgium and Austria standing out positively and 15-30yr BTPS bucking the trend. Given the fairly tight spread levels, especially of 5-10yr semi-core, we see widening risk as the ECB October meeting draws closer.
• Bearish momentum in Bunds has eased somewhat as rhetoric on North Korea has heated up. But with tax reform plans in the US set to take shape and 10yr Bund ASW remaining more than 5bp above our FV estimate, we stick to the view that 10yr Bund yields will breach 0.50% over coming weeks.
• The sharp shift to the right in the German elections suggests a tougher German stance towards Eurozone fiscal integration and in future debt (re)negotiations, implying (at the margin) somewhat wider peripheral spreads.
Rich/cheap analysis
• 2/3yr BTP-SPGB spreads tightened further as the situation in Catalonia escalated, but now look stretched assuming independence won’t happen.
• Long-end E-names continued to perform last week and now look expensive versus core and semi-core EGBs.
• Despite richening in ASW, 20yr NEDWBK cheapened further vs EIB, perhaps due to the tap of the NEDWBK 10/41.
• 7yr EFSF looks attractive vs. NEDWBK as earlier this year at the time of the French elections, probably since investors expect Q4 EFSF issuance (€5.8bn) to target the belly of the curve.
• Scheduled EGB supply of up to €15bn this week, from Germany and Italy (p. 3). Italy will announce the 28 Sep. medium/long term auctions today.
• Belgium will redeem €6.9bn and pay out €2.9bn in coupons.
• EFSF will tap the 0 11/22 line on Tuesday (€1bn). This will complete Q3 funding.
• The DSTA estimated funding needs of €49.6bn in 2018. Based on this we now think DSL issuance will come in below 2017’s nominal total of €31.6bn. Net issuance – even before subtracting PSPP buying flows – will thus be deeply negative. Q4 issuance will comprise a new 7yr (Oct 11) and a 10yr tap (Nov 14).
Events • Multiple ECB/Fed speakers during the week, with ECB’s Draghi speaking today and Fed’s Yellen tomorrow.
• EUR flash CPI (Fri) should not change much, with the risk of a higher headline reading. It is the last month before negative energy base effects kick in.