EGBS: 10-year OAT/Bund Spread Tightens On Cautious French Political Optimism
The 10-year OAT/Bund spread is 3bps tighter on the session at 83bps, amid hopes that French caretaker PM Lecornu will be able to gain enough support to pass a budget in last minute talks today.
- Lecornu is meeting with the Socialist and Green parties this morning. Reports overnight suggested that some in the Macronist bloc may be willing to suspend recent pension reforms as a concession to the left. A deal with the left would reduce near-term political uncertainty in France, but suspension of pension reform would keep domestic public finances on a damaging trajectory. Medium-term risks to OAT/Bund may still be skewed wider.
- EGB curves have bull flattened as a result of the cautious political optimism, with OAT 5s30s down 1bp to 155bps and German 5s30s down 0.5bps to 99bps.
- Futures volumes have been healthy, with ASML equity weakness also supporting the broader FI bid around the European cash equity open. German industrial production was much weaker-than-expected earlier (-4.3% M/M vs -1.0% cons, 1.3% prior)
- Bund futures are +25 ticks at 128.77, with initial resistance of 128.82 containing early upside. OAT futures are +48 ticks at 121.48.
- Germany will hold a 15-year Bund auction at 1030BST, while the ESM has sent an RFP for an upcoming transaction. We pencil in a transaction early next week of around E1.75bln (E1.5-2.0bln.
- Headlines from ECB’s Escriva were broadly consistent with the median Governing Council view (i.e. rates are appropriate at current levels for now, meeting-by-meeting approach with no forward guidance) and his previous comments.
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BONDS: Japanese Investors Bought JPY2.6trln of USTs In July
Japanese investors purchased JPY2.6trln worth of US Treasuries in July, according to latest Balance of Payments data, more than unwinding the JPY605bln of net sales seen in June. Year-to-date, Japanese investors have purchased JPY5.6trln of USTs.
- It highlights that despite ongoing US political/trade policy uncertainty and Fed independence concerns, there aren’t many alternatives to US assets for a country with as large a current account surplus as Japan (almost 5% of GDP as of Q2 2025). A reminder that the current account surplus must by definition be balanced by capital outflows in the form of direct/portfolio investment abroad (alongside other financial account components).
- Elsewhere, Japanese investors purchased around JPY335bln of German and French bonds in July.
- Over the next few months, it will be interesting to see if French flows are impacted by the latest uptick in political uncertainty. After President Macron called snap French legislative elections in May 2024, Japanese investors became notable sellers in OATs (see charts).
- Japanese investors sold JPY308bln of BTPs in July, while continuing to be steady net buyers of Gilts. Like France, it remains to be seen how Gilt flows are impacted by recent political developments ahead of the Autumn budget.
IRELAND BOND AUCTION PREVIEW: On offer this week
Ireland has announced it will be looking to sell a combined E1.0-1.5bln of the following at its auction this Thursday, September 11:
- the 2.60% Oct-34 IGB (ISIN: IE000LQ7YWY4)
- the 3.00% Oct-43 Green IGB (ISIN: IE000GVLBXU6)
COMMODITIES: Last Week's Gains Reinforce Bullish Conditions for Gold
A bear cycle in WTI futures remains intact and the latest bull phase appears to have been a correction. The pullback from last Tuesday’s high highlights a possible reversal and the end of the corrective phase. Initial resistance to watch is $66.56, the Aug 4 high. Key short-term resistance has been defined at $69.36, the Jul 30 high. A stronger resumption of weakness would pave the way for a move towards $57.71, the May 30 low. Gold remains in a clear bull cycle and last week’s gains reinforce current conditions. The yellow metal has breached a key resistance at $3500.1, the Apr 22 high, delivering a fresh all-time high. The break also confirms a resumption of the primary uptrend and an extension of the sequence of higher highs and higher lows. The next objective is $3623.1, a Fibonacci projection. Initial firm support lies at $3440.0, the 20-day EMA.
- WTI Crude up $1.05 or +1.7% at $62.9
- Natural Gas up $0.1 or +3.15% at $3.142
- Gold spot up $24.34 or +0.68% at $3611.69
- Copper up $1.1 or +0.24% at $456.05
- Silver up $0.16 or +0.4% at $41.1771
- Platinum up $19.42 or +1.41% at $1398.84
