JAPAN: Komeito Withdrawal From Gov't Puts LDP's Takaichi In Perilous Position
Leader of the centrist social conservative Komeito party, Tetsuo Saito, announced that his party wishes to 'reset' the governing coalition with the conservative Liberal Democratic Party (LDP) and that its lawmakers would not vote for the new LDP president, Sanae Takaichi, to become PM in a confirmatory vote expected in the National Diet on 20 October.
- The PM is confirmed in a two-round system. If no single nominee receives an overall majority, then the top two candidates hold a run-off . If the two chambers elect different candidates, a joint committee is formed to try to reach agreement. If there is no agreement, or the upper House of Councillors does not submit a nomination within 10 days, the lower House of Representatives' candidate is elected as PM.
- Takaichi has said to reporters that she would like to hold talks again next week, but whether Komeito accept remains to be seen. The two most likely scenarios would now appear to be:
- Takaichi reaches out to the opposition libertarian federalist Japan Innovation Party (Ishin) or conservative populist Democratic Party for the People (DPFP) to gain their backing. The DPFP have called for a blanket cut in sales tax to 5% that would be paid for via debt issuance, unspent gov't discretionary funds and any surplus from special accounts, as well as an increased tax threshold. Ishin have called for the elimination of sales tax on food for two years and the nomination of a 'second capital' in case Tokyo is damaged by natural disaster (likely Ishin's stronghold, Osaka).
- Ishin, DPFP and the main opposition liberal Constitutional Democratic Party (CDP) unite around a single candidate. There has been some speculation that Ishin and the CDP could unite behind DPFP leader Yuichiro Tamaki, but he said to reporters such a gov't could only work if there was ideological coherence.
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EURIBOR OPTIONS: ERU5 98.00/98.06 Call Spread Lifted
ERU5 98.00/98.06 call spread paper paid 0.25 on 6.5K.
FRANCE: OAT/Bund Spread Widens; New PM Lecornu Likely To Face Similar Challenges
The 10-year OAT/Bund spread has widened 1bp to 82bps this morning, underperforming EGB peers. Markets are digesting President Macron’s appointment of former defence minister Sebastien Lecornu to the PM post. Initial reactions from opposition parties suggest Lecornu will face many of the same challenges as his predecessors in passing a budget. This keeps French political and fiscal risks heightened, limiting meaningful narrowing risks for OATs.
- Olivier Faure, Socialist party leader, has noted that “There is a lack of understanding because the French were hoping for change, and deep down, Sébastien Lecornu at Matignon is Emmanuel Macron at Matignon; they are the same people” (source) A reminder that former PM Bayrou managed to push his 2025 budget through the National Assembly only because he received tacit support from the Socialists. This tacit support ended following Bayrou’s 2026 budget proposals.
- Meanwhile, RN’s Le Pen has said that Lecornu will be judged “based on his record, his actions, his policy choices in giving France a budget, and this against our red lines" (source),
- The far left LFI party has said that it will issue a symbolic censure motion against Lecornu’s government, and has unsurprisingly said that it will “not participate in a grand coalition”
- A reminder that a Bloomberg benchmark 10-year OAT roll yesterday has skewed OAT/EGB spreads wider by ~7bps this week.
EGBS: Commerzbank Expect Frequent Use Of New Eurex EU-Bond Future
In light of today’s Eurex EU-Bond future launch, Commerzbank note that “the EU Jul-34 will become cheapest-to-deliver (CTD) in the December contract. Liquidity will be key, as only a highly liquid future will offer the necessary market depth for efficient hedging, arbitrage and positioning. However, note that the open interest for Eurex futures is reported with a one-day lag, while the turnover should be available in real time”.
- Nonetheless, they expect “the future to develop into a frequently used product based on conversations with clients”.
- In terms of valuation, Commerzbank suggest that “the December futures seem fairly priced with implied repo rates (IRRs) trading close to €STR. Given no switch risk in the EU future, its IRR should also trade close €STR”.
