BTP: Familiar Risks At Play For BTP/Bund Spread Following EU-US Tariff Delay
May-26 08:54
The 10-year BTP/ Bund spread is biased slightly narrower at 101.5bps today, with the EU/US 50% tariff delay and Moody’s ratings decision after hours Friday supporting light outperformance versus Bunds.
- We have previously noted that meaningful (positive) progress on EU/US trade negotiations may be needed for the spread to sustainably trade below 100bps, and this reasoning still holds with the current backdrop.
- However, the tail risks for the spread have now changed, with the worst-case scenario of no US/EU trade deal now considerably more detrimental to the near-term Eurozone and Italian economic outlook than a week ago.
- The spread knee-jerked to a high of 104bps following US President Trump’s initial 50% tariff announcement, but had tightened back below 102bps by the time of Friday’s close.
- Meanwhile, Moody’s choice to move Italy to a positive ratings outlook (rating affirmed at Baa3) was BTP-supportive, but not a large surprise to markets. Moody’s rating on Italy is still one notch below Fitch and two notches below S&P
- Some highlights from Moody’s report:
- “The 2024 fiscal outturn was better than we and the government had expected”…” Domestic political stability increases the likelihood that the government will continue to narrow the deficits and achieve growing primary surpluses”.
- “The positive outlook is also supported by a robust labour market, sound household and corporate balance sheets and a healthy banking sector. Further expected improvements in the net international investment position are likely to support economic resilience and reduce Italy's susceptibility to event risk”.
- “The affirmation captures Italy's high debt burden which coupled with a gradual weakening debt affordability and structural challenges related to population ageing remains a constraint on its credit profile”.
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US TSYS: Extraordinary Measures And Cash Look Sufficient To Head Off X-Date
Apr-25 20:32
Treasury has about $164B in "extraordinary measures" available as of April 23 to avoid hitting the debt limit, per its regular report out Friday. That's out of a maximum total of $375B (they have used $211B).
- With Treasury cash looking healthy (around $600B), that's a fair amount of dry powder to get through the summer months to wait out the debt limit impasse. Tax receipts have looked strong with tariff revenues also starting to boost cash flows, further reducing the near-term urgency to adjust bond issuance.
- This has also helped push back analyst “x-date” expectations to later in the summer/September. We expect to hear from Treasury about its own x-date assumptions next week.
US TSYS: Treasury Market Trading Stayed Orderly In April: Fed Report
Apr-25 20:25
Liquidity across financial markets including the Treasury market deteriorated after President Trump's April 2 reciprocal tariffs announcement but market functioning was generally orderly, according to the Federal Reserve's semiannual report on financial stability, released Friday. (PDF link is here)
- Treasury market liquidity has been poor for years and yields were particularly volatile in early April, contributing to a deterioration in market liquidity, the Fed said.
- Nevertheless "trading remained orderly, and markets continued to function without serious disruption," according to the report, which looked at information available as of April 11.
FED: Ex-Gov Warsh: Fed Has Failed To Satisfy Price Stability Remit
Apr-25 20:22
From our Washington Policy Team - Some fairly sharp words today from ex-Fed Governor Warsh on the central bank (who for what it's worth is seen by betting markets as by far the frontrunner for the next Fed Chair):
- The best way for the Federal Reserve to safeguard its independence is for policymakers to avoid expanding the institution's role over time, including wading into policy areas that are outside its core mission, former Fed Governor Kevin Warsh, a leading contender to replace Jerome Powell as chair next year, said Friday.
- "I strongly believe in the operational independence of monetary policy as a wise political economy decision. And I believe that Fed independence is chiefly up to the Fed," Warsh said in a speech at a Group of Thirty event on the sidelines of the IMF meetings. "Institutional drift has coincided with the Fed’s failure to satisfy an essential part of its statutory remit, price stability. It has also contributed to an explosion of federal spending." His speech made no mention of Trump's tariffs or the appropriate monetary policy to deal with them.
- He said the ideas of data dependence and forward guidance widely adopted by Fed officials are not especially useful and might even be counterproductive.
"We should care little about two numbers to the right of the decimal point in the latest government release. Breathlessly awaiting trailing data from stale national accounts -- subject to significant, subsequent revision -- is evidence of false precision and analytic complacency," he said.
"Near-term forecasting is another distracting Fed preoccupation. Economists are not immune to the frailties of human nature. Once policymakers reveal their economic forecast, they can become prisoners of their own words. Fed leaders would be well-served to skip opportunities to share their latest musings."
