EU BASIC INDUSTRIES: Covestro: EU Foreign Subsidies Regulation

FVU5 109.25 calls 10K given at 0-13.

The 10-year BTP/OAT spread has taken another leg lower since the end of July, now just below 14bps for the tightest since 2007. BTPs have benefitted from a continued easing of EUR volatility metrics, which has come alongside a pullback in near-term trade policy uncertainty.

• Benchmark Italian yields already trade below French counterparts at 2- and 5-year tenors.
• A re-intensification of French political risks in the autumn (when the 2026 budget process gets underway) could be a catalyst for the 10-year BTP/OAT spread to also narrow towards 0bps.
• Since his 2026 budget proposals in mid-July, PM Bayrou has faced criticism from opposition parties. There is a strong likelihood that, given the gov'ts minority status, Bayrou will have to push the budget through using Article 49.3 of the French constitution in order to avoid a vote.
• In this light, 65bp level has provided support to the 10-year OAT/Bund spread over the last two weeks.

SFIZ5 96.55/96.75cs, bought for 2 in 2k.