European Interest Rates -Rising political risk premium in BTPs
10yr Bunds held steady for a second session amid lower volumes, as Eurozone inflation came out in line with expectations and month-end extension flows offered further support (as on Friday). EUR swap 10s30s – one of our favourite harbingers of short-term trends in Bunds – dipped back below 50bp, supporting our view that last week’s sell-off is unlikely to morph into Bund tantrum 2.0 – which we would not expect until the end of ECB QE comes on the horizon. Standing out on the spreads front was the outperformance of Bonos (and the ongoing underperformance of BTPs). Following the formation of a PP-led minority government, investors further priced out the political risk premium embedded in Bonos, while sizeable redemption and coupon flows by Spain may have offered additional support. By contrast, the political risk premium embedded in BTPs – which we currently estimate at around 35bp in the 10yr area – increased further, as polls on the constitutional referendum continued to show the yes-camp lagging behind. Yesterday’s ECB QE data, meanwhile, showed the pace of PSPP picking up again last week to €17.2bn from €16.5bn in the previous week. The weekly data thus far are consistent with an overall pace of QE in October of around €83bn, which confirms that frontloading ahead of the December holiday period has indeed begun. Today is All Saints Day, meaning large parts of Europe will be off. The ECB, however, will publish the country breakdown of the consolidated financial statement of the Eurosystem for end September, which should help shed light on the geographical distribution of the €45bn take-up in the second TLTRO II. There will be no EGB supply today, but tomorrow Germany will tap the 10yr on-the-run, which already traded 75bp special (s/n) yesterday. Spain and France will come to the market later this week as well as Ireland, which will announce the details of the auction later this morning. Note that Austria cancelled the November 8 auction date due to the recent syndicated 7y and 70yr deals.