EMISSIONS: Norway Rules In Favour of Elkem Over EU ETS Free Allowances Disparity

Limited reaction in the 10-year RAGB/Bund spread (38bps) after Fitch downgraded Austria’s rating to AA- (Outlook Stable) on Friday. Austrian fiscal fragilities are already well-documented. Last week the EU recommended opening an Excessive Deficit Procedure against the country, with “debt sustainability analysis indicating high risks over the medium term”. Ratings risk will be back at the fore in August, with S&P and Moody’s due to conduct reviews and both currently assigning a rating one notch above Fitch. 

• Year-to-date, RAGBs have underperformed the likes of OLOs, EU-bonds and OATs, with performance more in line with DSLs and RFGBs. However, simple linear scatter plots of 10-year yields against ratings and debt/GDP do not point to a serious mispricing of RAGBs at current levels.
• In its report, Fitch noted that “Austria's fiscal and macroeconomic outlook has further worsened since our previous review. The 2024 fiscal deficit was 4.7% of GDP, significantly exceeding our forecast of 3.7% of GDP, driven by a worse economic environment and overspending at the local government and municipality level. We expect government debt/GDP to continue rising in the medium term given this new starting point, despite the new government's sizable fiscal consolidation programme”.
• Fitch “forecast general government deficits will narrow gradually, to 4.3% of GDP in 2025 and 3.9% in 2026. Our forecasts are slightly more optimistic than the government's projections, but they are larger than the deficits of 4.0% in 2025 and 3.6% in 2026 that we expected during our previous review in January 2025”.
• Over the long-term, they write that “Austria will face increasing fiscal pressure from an aging population and climate-related expenditure. The Fiscal Council projects that from 2029, the primary balance will deteriorate by 0.7pp of GDP over the following five years due to these challenges. The evolving geopolitical landscape is also contributing to increased spending pressures on defence”.
• Note that today is an Austrian public holiday (Whit Monday).

• Continued unwind in Bonds, no new headline as such, the price action in EGBs was and is still BTP led, with interest to tighten the BTP/Bund spread, this is now trading at 90.5bps, and we are getting at levels last seen since 2015.
• Immediate small resistance in Bund is hear at 130.85, and a push all the way back to 131.28 would reverse the US NFP sell off.

Goldman Sachs “continue to like Euribor Z5/Z7 steepeners as near-term risks still point towards cuts, whereas the skew of risks further into 2026/27 will be towards better growth and higher inflation vs. current pricing. This deserves an upward sloping money market curve, and this bearish view on the rates expectation curve should limit the declines in core yields other than the very front-end”.