EGBS: 10-year Bund Yields Pierce 2.70%, Narrow Gap To FV
10-year Bund yields have pierced the 2.70% figure, a level which contained upside earlier this week. Today’s 2bp rise has narrowed the gap to our rough fair value estimate of around 2.75%. We’ve previously highlighted that a move back towards the 2.80% seen in early September may require increased conviction that the ECB's easing cycle has concluded, alongside durable signs that the ramp-up in German fiscal spending and associated issuance is underway heading into 2026. There has been progress on both these dynamics in recent days.
- The implied probability of another ECB cut this cycle has fallen to 30% (vs ~45% a week ago), and Germany’s 2026 core budget (which was approved by the budget committee yesterday) has pencilled in E8bln more borrowing than assumed in initial drafts.
- Intraday upward pressure in yields has largely been spillover from Gilts and to a lesser extent USTs.
- There has been no safe-haven support for Bunds from the 1% pullback in European equity futures. However, 10-year EGB spreads to Bunds are up to 2.5bps wider, led by the risk-sensitive BTPs.
- With French fiscal developments back in focus this week, note that the French government has announced that the National Assembly will not sit to debate the 2026 budget this weekend, pointing to "fatigue" in the chamber. Parties to the left have deemed the decision to be "unacceptable".
- The German curve has bear steepened, with 5s30s up 2bp to move back above the 100bp figure (which has limited upside since mid-September).
- Bund futures are -22 ticks at 128.70, pushing through prior support at 128.80 and reinforcing the current corrective bearish condition.
- The second reading of Eurozone Q3 GDP confirmed flash estimates of 0.2% Q/Q, while employment growth of 0.1% was in line with the ECB’s projections.
Want to read more?
Find more articles and bullets on these widgets:
Historical bullets
OPTIONS: Expiries for Oct14 NY cut 1000ET (Source DTCC)
- EUR/USD: $1.1450(E537mln), $1.1500(E848mln), $1.1600(E663mln), $1.1650(E636mln)
- USD/JPY: Y151.50($691mln), Y152.00($751mln)
- AUD/USD: $0.6500(A$1.0bln), $0.6580-00(A$1.2bln)
- USD/CAD: C$1.4000-10($598mln)
US 10YR FUTURE TECHS: (Z5) Sights Are On The Bull Trigger
- RES 4: 114-10 High Apr 7 (cont.)
- RES 3: 114-00 Round number resistance
- RES 2: 113-29 High Sep 11 and the bull trigger
- RES 1: 113-17+ High Oct 14
- PRICE: 113-14 @ 11:10 BST Oct 15
- SUP 1: 112-26 20-day EMA
- SUP 2: 112-16/01 50-day EMA / 50.0% of Jul 15 - Sep 11 upleg
- SUP 3: 111-26 Low Aug 26
- SUP 4: 111-13+ Low Aug 18 and a key support
Treasuries are holding on to this week’s gains and a bullish theme remains intact. Last Friday’s climb resulted in a break of the 113-00 handle, signalling scope for stronger rally towards 113-29, the Sep 11 high and a bull trigger. Clearance of this hurdle would confirm a resumption of the M/T uptrend. Support at the 50-day EMA at 112-16 remains intact for now. A clear break of the average would expose 111-13+, the Aug 18 low and a key support.
ITALY: 2026 Budget Proposal Sees 2026 Deficit At 2.8%; Growth and Ratings Key
Italy’s 2026 draft budget was approved by the government yesterday. As has been reported in recent weeks, the government expects the budget deficit to fall to 3% GDP in 2025. The deficit is expected to fall to 2.8% in 2026, 2.6% in 2027 and 2.3% in 2028. The 2026 deficit forecast is slightly more optimistic than current Bloomberg consensus of 3.0% and the EC’s Spring Projection round forecast of 2.9% (which of course do not yet account for the policies incorporated into the budget proposal).
- Having already tightened by ~35bps this year, the 10-year BTP/Bund spread has struggled to sustainably consolidated below 80bps in recent months. Upcoming growth data and ratings action will be key in determining whether further near-term narrowing is plausible.
- Growth: Q3 flash GDP is due on October 30. Consensus (according to Bloomberg’s ECFC page) looks for 0.1% Q/Q growth (vs -0.1% prior). We have previously noted that the main barrier to continued Italian fiscal consolidation is the country’s weak growth trajectory.
- Ratings: Moody’s will review Italy’s rating on November 21 (current rating Baa3, Outlook Positive). Moody's rating is two notches below Fitch and S&P, so at least a one notch upgrade is expected. We still think a one notch upgrade to Baa2 while maintaining a positive outlook seems reasonable.
- Some details of the budget proposal via Politico:
- “While ongoing discussions between the government and banks have yet to yield an agreement on what form the tax would take, the hard-right League, of which Giorgetti is a member, is seeking between €4 billion and €4.5 billion from a range of measures, according to two people familiar with the matter. The measures would also apply to insurers, one of the people said”.
- “Major policies in the draft budget, which Italian lawmakers will study in the coming months, includes a €9 billion cut to income taxes for the Italian middle class to 33 percent from 35 percent and €2 billion to align salaries with the cost of living after years of stagnation.
“The draft, which is due to be sent to the European Commission on Wednesday, also earmarks €3.5 billion for “anti-poverty measures” and €2.4 billion for health care in 2026".
