NETHERLANDS: German Package Likely To Leave Netherlands As EZ Fiscal Outlier
The likely passage of incoming German Chancellor Merz’s fiscal package through Bundesrat on Friday has cemented prospects for heightened German spending over the next few years. This is expected to push the German debt/GDP ratio higher, likely further isolating the Netherlands as a fiscal outlier in the Eurozone. Although 10-year DSLs are fairly priced according to a simple rating curve, they screen as slightly cheap on a yield vs debt/GDP basis. This may be supportive of demand at next week’s DSL auction.
- In Q3 2024, the Dutch debt/GDP ratio was just 42%, coming alongside a 0.4% primary surplus (4Q rolling sum to GDP). Appetite for increased fiscal easing via the EU’s “ReArm Europe” package also appears limited in the Netherlands, with the three of the four ruling coalition Parties voting in favour of a motion rejecting the scheme. The Dutch Government will now abstain on any European Council vote related to the programme of loans as a result.
- Fiscal divergence has seen the 10-year DSL/Bund spread (using the previous on-the-run 10-year 2.50% Jul-34 DSL to allow for a cleaner time series) tighten from 18bps to 15bps since Merz’s original March 4 announcement.
- Outperformance versus Bunds has been seen across core, semi-core and periphery EGBs over the past two weeks, given the German-centric nature of fiscal announcements and with extra spending through the EU’s package likely to fall short of the E800bln headline figure touted (see here for more)
- However, the political uncertainty stemming from the coalition divide has seemingly limited DSL outperformance against similarly rated peers of Austria and Finland. The 10-year RAGB/DSL/RFGB fly is currently 31bps, ~4bps below the March 4 close.
- The next DSL auction is scheduled for next Tuesday (March 25), where E1.5-2.0bln of the 2.50% Jul-35 DSL (ISIN: NL0015002F72) will be on offer. Assuming the top of the range is sold, the Netherlands will have sold ~38% of its 2025 issuance target of E40bln. The Q2 issuance calendar should be released in the coming days.
- The next Dutch redemption will be E19.9bln of the 0.25% Jul-25 DSL, which matures on July 15.
Want to read more?
Find more articles and bullets on these widgets:
Historical bullets
ECB: Weekly ECB Speak Wrap (Feb 10 – Feb 17)
In the following publication, we provide a summary of ECB-speak between February 10 and February 17: 250217 - Weekly ECB Speak Wrap.pdf
The ECB’s March decision is just over 2 weeks away, and policymakers have not shown any appetite to push back on market pricing for another 25bp cut. The March decision will include a new set of macroeconomic projections, while any tweaks to the policy statement guidance following the recent report on neutral rates will also be in focus.
- On the topic of neutral, Vujcic joined Governing Council colleagues in playing down its role in calibrating near-term policy. Meanwhile Nagel provided a slightly more nuanced view, noting that neutral “indicates when we need to be more cautious with policy-rate moves so that we don’t take a wrong step”.
- Holzmann pushed back on the idea of 50bp rate cuts, though this probably already aligns with the median Governing Council view.
- Bank of Italy Governor Panetta spoke for the first time since November, striking a characteristically dovish tone. He warned that “a less decisive easing of monetary policy could lead to excessively low inflation in the medium term”.
- ECB-dated OIS price 77bps of easing through year-end, around 12bps more hawkish than a week ago. EUR STIR implied yields were dragged higher by the long-end at the start of the week, while reduced near-term growth risks on the back of vague US reciprocal tariff plans drove hawkish repricing into Friday’s close.
- The week ahead is headlined by the February flash PMIs on Friday, while ECB Executive Board Member Cipollone will speak on the ECB’s balance sheet at an MNI Event on Tuesday (sign up here). See here for a recent note on the impact of declining Eurozone excess liquidity.
ESM ISSUANCE: 10-year Feb-35 syndication: Priced
- Reoffer: 99.063 to yield 2.859%
- Size: E2bln WNG
- Books closed in excess of E8.5bln (ex JLM interest)
- Spread set earlier at MS+42bps (guidance was MS+45 area)
- HR 98% vs 2.50% Feb-35 Bund (ref 100.16 + 37.8bps)
- Maturity: 26 February 2035
- Coupon: 2.75%, Long first
- Settlement: 24 February, 2025 (T+5)
- ISIN: EU000A1Z99W5
- Bookrunners: BofA (DM/B&D), DB, Santander
- Timing: TOE 12:22GMT / 13:22CET. FTT immediately.
From market source
JPY: Fading USD/JPY Adds to Bullish JPY Impetus
USD/JPY fade picking here slightly into (what would be) the US open - USD/JPY edges to a new pullback low at 151.42, marking a break through 151.65 and the overnight lows. Weakness here looks contained until any test or break through more notable support at 150.93 - the YTD low posted just over a week ago.
- Perhaps unsurprisingly volumes are lighter than average so far Monday with the US holidays, however activity is holding up pretty well: CME JPY futures show activity running ~15% below what you'd expect to see at this point in the session.
- As mentioned above, conviction over shorting EUR/JPY is building among the sell-side, and coincides with the failure of the cross to break technical resistance at the 50-day EMA in recent sessions - and should USD/JPY take out the bear trigger at 150.93, that makes two notable technical indicators pointing to JPY strength.
