EUROPE: EPC Summit Gets Underway Shortly

German ASWs vs. 3-month Euribor trade 0.9-2.0bp wider, with the front end of the spread curve outperforming and the long end lagging.

• The broader risk-off move helps explain the direction of travel for spreads, while the presence of this morning’s 30-Year supply explains some of the underperformance further out the curve (at least intraday).
• Schatz & Bobl spreads vs. 3-month Euribor are 3-4bp off last week’s year-to-date closing highs, while the Bund ASW is essentially equal with last week’ closing high and the Buxl spread is through last week’s closing high, set for the highest close since mid-February.
• Looking at the recent moves, Commerzbank note that “our key specialness metric cheapened below zero for the first time since 2015 and CTDs as well as on-the-runs also trade calm. Thus, the return of the collateral risk premium explains the entire richening of swap spreads, which is also visible in the aggressive steepening of the Bund ASW-structure”.
• They go onto highlight that “Bunds are emerging as the main beneficiary, while UST vs. swap underperformance puts question marks behind their status as safe haven assets. This dynamic is also giving Buxl spreads a lift close to pre-election levels”.
• Looking forwards, they suggest that “for long-dated Bund spreads to decouple from USTs and Gilts on a sustained basis we need to see evidence that the euro could rival the dollar as the world's reserve currency. However, we stick with our base case, where major swap curves look set to converge as risk sentiment stabilises and German fiscal risks take centre stage again by next year”.

This morning’s soft tone for risk assets sees 10-year EGB spreads to Bunds widen. The BTP/Bund spread is up 2bps to 120bps, but remains comfortably below last week’s ~126bp close following S&P’s rating upgrade after hours on Friday. 

• Books are open for today’s dual tranche 7-year BTP / 30-year BTPei syndication. We pencil in a wide E7-13bln range for the 7-year size, while the 30-year is a E3bln WNG.
• Italian PM Meloni will meet with US President Trump on Thursday, in an attempt to negotiate some tariff reprieve for the EU (including Italy’s export-dependent manufacturing sector). Bloomberg reported yesterday that little progress has been made between the EU and the US at present.
• GGBs underperform for the second consecutive session, with spreads 3bps wider at 90.5bps (though still well shy of last week’s 100bp extreme).
• Greece will sell E200mln of the 3.875% Mar-29 GGB this morning (bidding deadline 1000BST/1100CET).
• In France, state audit chief Moscovici and Finance Minister Lombard appear before the National Assembly’s finance committee. Lombard said over the weekend that E40bln of savings are needed to meet the 2026 budget deficit target of 4.6% GDP. The OAT/Bund spread is 1bp wider at 76.5bps at typing. 

The combination of broader risk-off price action (trade war- and European earnings-driven) and softer-than-expected UK CPI data (albeit with the headline reading matching the median of sell-side analysts that we read) drives a rally in gilts.

• Futures trade as high as 92.32, breaching the next resistance level at the 50.0% retracement of the April 7-9 sell off (92.24), before a fade back to ~92.15. Our technical analyst notes that the bearish threat in the contract remains intact.
• Yields ~4-6bp lower across the curve, flattening seen, 10s outperform.
• 10s ~2bp tighter vs. Bunds, continuing to reverse some of last week’s notable spread widening.
• SONIA futures and BoE-dated OIS roughly in line with levels we flagged ahead of the gilt open, showing ~85bp of cuts through year end vs. ~81.5bp late yesterday.
• Eyes on macro/cross-market cues for much of the day, with comments from Fed Chair Powell & U.S. retail sales data headlining the global calendar.
• On the supply front, the DMO will conduct a tender of GBP1.5bln of the 0.125% Jan-28 gilt this morning.