Yesterday marked the first of a number of busy days in the primary EGB market. Against this backdrop, price action in Bunds was choppy with a rally in USTs eventually driving 10yr Bund yields slightly lower on the day. Despite the 2bp tightening in 10yr UST/Bund spreads, boxing 10s30s UST steepeners against DBR flatteners remains a compelling trade in our view. As markets awaited Catalan leader Puigdemont’s appearance in the regional parliament – which resulted in a suspended declaration of independence – long-end peripheral spreads closed more than 2bp wider versus Bunds. Standing out in core space, was the 0.3bp tightening of 7-10yr NETHER.
Dutch PM Mark Rutte yesterday presented the coalition agreement between the four parties making up the new government. The announced tax and spending measures are projected to worsen the budget balance in 2021 by 1.2ppt of GDP, though a budget surplus is still foreseen while debt-to-GDP is still projected to drop to well below 50%.
Today the main focus is on Spain’s PM Rajoy’s address in parliament, in which he possibly announces a triggering of Article 155 of Spain’s constitution. Moreover, we have ECB Chief Economist Praet speaking later today, as well as Fed governors Kaplan and Evans. The September FOMC minutes are also due for release, possibly nudging the market-implied probability of a December hike, currently 77%, up a bit further.
EGB supply. Today Germany taps the OBL 10/22 for €3bn. The belly of the curve has cheapened slightly over the past week with the 2-5-10 fly up by almost 2bp (‘0.5/1/0.5’). In ASWs the bond still looks rich at above 50bp, which is in part owed to the recent (geo-) political risk sentiment. Heading into the ECB meeting, these valuations should only be sustained in a very dovish taper scenario and a reinforced rates forward guidance.
Elsewhere, the DSTA will launch the new DSL 1/24, with the preliminary initial spread guidance vis-à-vis the reference DBR 2/24 set at +10.5-13.5bp yesterday. Elsewhere,Portugal taps the PGBs 10/22 and 4/27 for a combined €1-1.25bn. Hopes of further rating upgrades, and the associated re-inclusion in benchmark indices, has meant PGBs have been largely shielded from the recent widening in SPGBs and BTPs.