BONDS: BTP & OAT Yields Unlikely To Tempt Japanese Investors After Recent Sales
A little more on our earlier point re: Japan shedding French bond exposure in the month of August, as well as the extension of the recent Japanese selling of Italian paper.
- 10-Year BTPs & OATs (which trade at very similar levels) only provide a relatively slender 20-25bp FX-hedged yield pickup over 10-Year JGBs, while the long end of the JGB curve continues to provide meaningfully higher yields.
- This provides little incentive for Japanese investors to participate in those markets, given the ongoing French political and fiscal risks, along with already tight levels in the BTP/Bund spread.
- One caveat to this is that the Japanese long end may be subjected to greater volatility after the ascension of Takaichi to Prime Minister.
- However, she watered down her expansionary fiscal stance during her election campaign, and although the session of JGB trading immediately after her victory saw meaningful twist steepening of the curve, yesterday’s 30-Year JGB auction drew firm demand, which could suggest that domestic investors are not hugely worried about her fiscal stance, further lessening the need to seek out offshore exposure.
Fig. 1: JGB Yields & FX-Hedged 10-Year OAT & BTP Yields From The Perspective Of A Japanese Investor
Source: MNI - Market News/Bloomberg Finance L.P.
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EURGBP: BoE Pricing Could Spell Difficulties for Consensus EURGBP Long View
While broader G10 FX ranges are muted, GBP/USD has improved to the best levels of the session, hitting 1.3536 to narrow the gap with the post-payrolls highs of 1.3555. Clearance here would put the price at new monthly highs and within range of 1.3595 - clustered horizontal resistance.
- Currency markets have proven more sensitive to volatility in the longer-end in recent weeks - of particular relevance to GBP given the uptrend in 30y UK Gilt yields - a recent triangle breakout on the daily chart reinforces this theme. Sensitivity here
- As such, politics and the near-term fiscal trajectory of the UK are to remain a key driver for markets here. Keir Starmer's reshuffle will likely be ineffectual for markets given Chancellor Reeves remains in place headed into the November 26th Autumn Budget, although recent appointments of economic advisers to No. 10 have raised some speculation that Reeves' influence over economic policy may have waned.
- As a result, sell-side remain cautious on GBP - however the vast majority prefer long EUR/GBP exposure over exposure to USD given the building pricing of a Fed Sept cut of potentially more than 25bps. This is despite sell-side pushing out expectations of BoE rate cuts this year (see Deutsche Bank, HSBC earlier today) - an extension of which could work against the consensus view of EURGBP higher. Key support to watch lies at 0.8597, the Aug 14 low. Clearance of this level would reinstate the recent bearish threat for the cross.
SPAIN T-BILL AUCTION PREVIEW: On offer this week
Spain has announced it will be looking to sell a combined E2.0-3.0bln of the following letras at its auction tomorrow, September 9:
- the 3-month Dec 5, 2025 letras
- the 9-month Jun 5, 2026 letras
GERMAN DATA: Exports To US and China Continue Decline While Trade W/ EU Firmer
The German trade surplus, contrary to expectations for an uptick, decreased to E14.7bln in July (seasonally-adjusted, vs E15.5bln cons, E15.4bln prior, revised from E14.9bln), the second lowest since May 2023. The decrease came as an exports decline (-0.6% M/M vs 0.1% cons, 1.1% prior, revised from 0.8%) outpaced marginally lower imports (-0.1% M/M vs -1.0% cons, 4.2% prior, revised from 4.1%). Recent trends in the data suggest that German trade is becoming more EU-centric.
- As a % of nominal GDP on a 12-month rolling basis, the trade surplus extended its current downtrend, at 4.8% as of July, 1.1pp below levels seen around a year ago. That compares with a 2015 high of 8.0% and 2022 low of 2.1% (see bottom left chart).
- Across countries and back on a nominal basis, the US continues to stand out with exports to the country collapsing, sitting at their lowest since December 2021 after four consecutive sequential declines (23.5% decline vs March which was underpinned by tariff-front running).
- Exports to China also screen weak, printing the lowest since August 2016 and having declined 26.5% if comparing the last three months to the series' highs. This decline comes against the backdrop of reports (1,2) suggesting China has built significant manufacturing overcapacity in recent years, indicated by domestic supply rising faster global demand, rising numbers of lossmaking industrial firms in the country, as well as declining capacity utilization, which may weigh on demand for German products.
- Exports to and imports to other EU countries both appear to be on a solid uptrend, meanwhile, confidently standing above cycle lows seen around a year ago.
- IFO export expectations deteriorated in August, falling to -3.6 points, from -0.3 points in July. “Disillusionment is spreading in export business [...] although a tariff rate of 15 percent from the US is less than feared, it will nevertheless weaken export momentum”, IFO comments.
