EGBS: German Curve Bear Flattens Following PMIs

Bailey speaking on global curves and the UK experience:

• "BANK OF ENGLAND'S BAILEY: WE HAVE SEEN STEEPER YIELD CURVES, THAT IS GLOBAL PHENOMENON" - Reuters
• UK EXPERIENCE IS NOT OUT OF LINE WITH OTHER MARKETS
• CAUSE OF STEEPER YIELD CURVE REFLECTS GREATER UNCERTAINTY ON TRADE POLICY"

He's speaking in front of lawmakers on the BoE's financial stability report - unlikely to get much on monetary policy specifically - but any references to UK inflation or the jobs market will be watched carefully. Livestream here: https://www.parliamentlive.tv/Event/Index/e1eb2a6b-6c37-43d3-a69b-566e1b7a84ab

Incorporating yesterday’s Q1 Eurozone fiscal data, a simple chart of debt/GDP to 10-year yields crudely isolates Spanish, French and Italian bonds as cheap (i.e. trading above the linear line of best fit). While well documented French political and fiscal risks continue to warrant a yield premium for OATs, there may be scope for continued relative outperformance of Oblis and BTPs in the coming months.

• We wrote yesterday that while Italian interest expense growth exceeds that of nominal GDP, this is mitigated by the Government’s Q1 primary surplus of 0.4%. Meanwhile, strong Spanish real GDP growth post Covid has kept a healthy gap between interest expense growth and nominal GDP growth. Spain’s primary deficit also narrowed to 0.6% in Q1 from 0.7% in Q4. On the other hand, the difference between French interest expense growth and nominal GDP narrowed a notable 0.8pp to -0.7pp in Q1, a concerning development for the debt/GDP outlook given France's 3.6% primary deficit (despite ongoing attempts at fiscal consolidation).
• The outlook for net issuance also favours Italian and Spanish paper over France: We expect the mid-August Bono/Obli auction to be cancelled, while there is a sizeable E24bln Spanish redemption due on July 30. We also expect the mid-month 3/7/15-50-year BTP auction to be cancelled, with a E13bln BTP redemption then due on August 15. Meanwhile, we expect the two August OAT auctions to go ahead as planned, and there are no French redemptions due until October.
• Elsewhere, 10-year Bund yields trade rich to the debt/GDP curve owing to German paper’s haven/reserve status in the EGB space. Greece’s impressive fiscal consolidation continues to support GGBs, with 10-year yields currently trading just below OATs.