Global and European Interest Rates

A risk-on rally pushed 10yr UST yields above 2.50% again and dragged 10yr Bund yields above 0.46% yesterday. The duration heavy supply constituted an additional burden for Bunds, where in particular long-end ASWs felt the weight of the new 30yr ESM and the 30yr DBR tap.

EGB spreads traded mixed yesterday. Semi-core traded on the back foot with Belgium underperforming somewhat versus France. The 10yr OAT/OLO spread had widened to 17bp in the run up to the Green OAT and had started looking stretched. That said, another driver of this spread are the upcoming French elections, where payments to the wife of the Republican presidential candidate Fillon have come under scrutiny by the press. This underscores that much can still happen and a defeat of Front National’s Le Pen is not a done deal. 10yr SPGBs almost completely reversed yesterday’s supply induced widening versus Bunds. BTPs however extended its underperformance after the Italian constitutional court struck down parts of the lower house election law and stated that the new system was immediately applicable.

The court upheld the majority bonus for the party passing the 40% threshold, but declared the run-off vote (if no party manages to pass 40% in the first round) unconstitutional. Note that current polls see no party above 40%. While this could pave the way for re-elections in 2017, President Mattarella has called for a harmonization of the lower house and senate electoral laws before new elections – the latter still being based on a proportional representation. Following the UK Supreme Court ruling the government is set to introduce a Brexit bill to parliament as soon as today.

However, the main focus in the UK will be on the 4Q GDP report. Or economists forecast the report to confirm that despite the Brexit vote in June the UK grew faster than the US, Eurozone and Japan in 2016. EGB supply. Today Italy will tap the BTPei 9/32 (€0.5-1bn) and the CTZ 12/18 (€2- 2.5bn). For Monday Italy announced the issue of a new 10yr BTP 6/27 (€3.5-4bn) alongside taps of the BTP 11/21 (€2.25-2.75bn) and the CCTeu 2/24 (€1.75-2.25bn).