Global Rates, 5-30 Spread Widening, Jackson Hole
BTP/Bund spreads experienced increased widening pressure yesterday, with investors appearing to unwind some of their summer carry trade positions. 5-30 spreads over Bunds widened by c.7bp, while the concession versus Bonos was c.3-4bp. The upcoming weeks and months hold quite some headwinds for BTPs: the resumption of supply pressure, with BTP auctions slated for Wednesday next week, an ECB QE taper decision pending this autumn and the general elections looming early next year. That this is not yet a classic flight to safety episode is underscored by the fact that 10yr Bund yields were unchanged at 0.40%. Moreover, semi-core spreads were little changed, even though 10s30s in OLOs and OATs steepened by more than 1bp. Meanwhile, equity markets (outside of the FTSE MIB) seemed more preoccupied with regaining some of the lost ground over the past weeks.

Ahead of the Jackson Hole symposium kicking off tomorrow, ECB Draghi’s opening speech at the Lindau Nobel laureates meeting on economic sciences today will be followed closely. But it would be an unusual choice of venue and timing to provide new policy guidance. Elsewhere, flash Eurozone PMI data should confirm the ongoing recovery across the currency bloc. EGB & SSA supply. Today Germany will tap the 10yr benchmark DBR 8/27 for €3bn. Absolute 10yr yields are relatively low given that levels around 0.60% were seen a little more than a month ago.

The recent richening of 10yr Bunds is also evident in the 5/10/30yr fly valuation, which is back near the levels prevailing before Draghi’s Sintra speech. The auction may nonetheless be supported by its timing, with the carry trade unwind seemingly having started. Moreover, repo specialness (c. 25bp in s/n yesterday) remains a strong selling point of the 10yr Bund. In SSA space UNEDIC has mandated banks for a tap of the 4/32, thus following in the footsteps of NWB bank and Rentenbank yesterday. The former priced a €600mn 30yr social bond NEDWBK 1/48 at MS+19 versus an initial guidance of MS +22. The latter launched the 8yr RENTEN 8/25 at MS -23 coming from an initial guidance of MS -21. We are also still waiting for an RfP from the EFSF ahead of next week’s auction slot.