OIL: Kazakh Oil Flows Via Druzhba to Germany Continue

The 10-year OAT/Bund spread has tightened ~4bps since last Thursday’s close, currently at ~66.5bps and now little changed on the month. However, OATs have still underperformed other EGB peers during this period, and ongoing political/fiscal risks will limit scope for meaningful reprieve. 

• Although PM Bayrou’s 2026 budget proposals have faced criticism from opposition Parties, his minority government has not yet been subject to a fresh censure motion. That likely delays immediate political risks to the autumn, when the budget process begins in earnest.
• However, it is likely that Bayrou will need to push the budget through using Article 49.3 of the French constitution in order to avoid a vote in the National Assembly. This would risk a censure motion.
• Otherwise, he will have to negotiate with opposition parties such as the Socialists to push the budget through. This would surely water down his proposed fiscal consolidation measures - a difficult trade-off against a backdrop of already unfavourable fiscal arithmetic.
• The 10-year BTP/OAT spread remains around ~16.5bps, but the trend is still in favour of further narrowing. We noted yesterday that the net issuance backdrop over the next few months also favours BTPs and Oblis over OATs.

Little to counter the bearish steepening impulse seen in Asia trade so far, with impending Bund & gilt supply eyed and no meaningful reaction to Japanese PM Ishiba’s pushback against media speculation suggesting that he is set to step down.

• Major global FI futures at/just off session lows, respecting yesterday’s ranges.
• EGB spreads to Bunds little changed to 1.5bp tighter, move aided by the equity rally stemming from news of a U.S.-Japan trade deal.

A fairly sedate start to London trade for U.S. fixed income contracts, with the Asia bear steepening moves in the long end and SOFR futures STRIP holding.

• SOFR flow headlined by a recent 4K buyer of SFRZ5, paying 96.105.