BTP: Further Tightening In Spreads Unlikely Without EU-US Trade Progress
May-09 08:41
It may be difficult for the 10-year BTP/Bund spread to see further tightening towards the 100bp handle without meaningful progress on US-EU trade deals. This morning already sees the spread 1bp wider from yesterday’s close at 106bps, despite the relatively supportive risk backdrop. This suggests the risks are skewed towards a retracement of the ~25bp narrowing seen since the April 9 close of 129bps.
- This week, the EU has announced details of its intended retaliatory measures (totalling E95bln) if a deal with the US is not reached.
- Exports to the US make up ~10% of total Italian exports, so tariffs (even at the current 10% level) will have a direct downward impact on Italian growth, all else equal. Meanwhile, weak demand from other key trading partners (e.g. Germany) will continue to drag. The April manufacturing PMI noted that “new export orders were also down again in April, in part reflective of tariff uncertainty”.
- Although recent fiscal data has been encouraging (the 2024 budget deficit of 3.4% GDP was notably below the Government’s 3.8% projection), weak growth increases the burden on the Government’s revenue/expenditure mix to achieve 2025 deficit and debt to GDP targets.
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EQUITIES: Deutsche Bank Call Option
Apr-09 08:39
DBK (20th June) 19c, bought for 1.17 in 9k.
SWAPS: UK Spreads Little Changed To Lower
Apr-09 08:33
Gilt swap spreads are little changed to lower, proving a more sensitive to moves in U.S. peers than the German equivalents.
- 2-Year swap spreads widened in early trade, but have quickly faded towards late Wednesday levels, as the dovish move in the front end of the SONIA strip is fully accounted for on both sides of the spread and with 2-Year yields off session lows.
- Further out the curve, swap spreads are ~0.5-1.5bp lower vs. late Wednesday levels, but off early session lows, roughly replicating moves in outright bonds.
GILT AUCTION PREVIEW: 4.375% Mar-30 gilt
Apr-09 08:24
- The DMO will return to the market this morning with GBP4.5bln of the 5-year 4.375% Mar-30 gilt on offer.
- This will be the fourth auction of the gilt, but marks an increase in auction size from the GBP4.25bln seen for short-dated gilts recently.
- Given market conditions and the larger auction size there might be a larger concession than usual this morning. We also note that large concession ahead of the 30-year gilt auction yesterday (followed by a 25 tick rally in gilt futures on the publication of the strong results).
- Bid-to-covers have ranged from 3.00-3.39x (albeit with slightly smaller auction sizes).
- The past couple of auctions have seen the lowest accepted price come very close to the pre-auction mid-price.
- There are two further 4.375% Mar-30 gilt auctions scheduled in FQ1 (7 May and 17 June).
- Timing: Results will be available shortly after the bidding window closes at 10:00BST with a further GBP1.125bln available to successful bidders through the PAOF.
