European Interest Rates & Bonds
As the focus shifts to the European risk events close by, “Trumpflation” gives way to risk off patterns – and we would not stand against this trend. With polls still pointing to a “no”- outcome in the Italian constitutional referendum on 4 December, markets are also mulling the potential knock on effect for ongoing recapitalisation efforts within the Italian banking system – worries that were also reflected in equity markets. In EGBs, 10yr Bund yields dipped below 0.20% with the ASW widening to above 45bp – closer to levels last seen immediately after the Brexit vote. The Schatz again tested new yield lows beyond -0.76%, but note that the German front end remains also driven by collateral scarcity, exacerbated now by month-end. EGB spreads drifted wider again, though more uniformly as the Italian issues are seen less in isolation within Europe. Recouping some of the day’s initial widening, 10yr Italy ended around 3bp wider versus Bunds, but still managed to slightly outperform Spain. It is worth noting, though, that the BTP/SPGB spread has held up relatively well broadly around 50bp even as the BTP/Bund spread marked new long term highs closer to 190bp. As both Italy (see below) and Spain will be active in primary markets this week, additional supply concessions in light of the looming event risks may play their part as well, but it was also core and semi-core EGBs that widened against Bunds. 10yr France for instance also widened by around 2bp. Note that the latest weekly ECB QE data showed a slowdown in PSPP purchases in the week ended 25 November. The ECB bought only €14.3bn versus €17.8bn in the prior week. The latest figure is more in line with the monthly target of €80bn, thus suggesting no additional frontloading, which had been quite pronounced in the weeks before. EGB Supply: Today Italy will reopen the 5yr BTP 11/21 (€1.25-1.75bn) and the 10yr BTP 12/26 (€1-1.5bn) benchmark bonds, alongside taps of the CCTeu 6/22 (€0.5-1bn) and CCTeu 2/24 (€1.25-2bn). The BTP benchmarks rolls versus the predecessors are still trading close to the highs, even as the curve has started to re-flatten last week: The 5y traded at c. 13bp versus the BTP 6/21 and the 10yr at c. 7.5bp versus the BTP 6/26.