OAT: Politcal Risk Premium Building Back Up
The 10-year OAT/Bund spread is 2bps tighter today at 73bps, unwinding over half of yesterday’s 3.5bp widening. Despite the intraday outperformance versus EGB peers, political risk has reasserted itself in recent days, with PM Bayrou struggling to reach an agreement on pension reforms with social partners. With the 12-month embargo on holding new elections also almost over, thus placing the risk of Macron calling a new vote back on the table, the OAT/Bund spread has widened almost 8bps through June. Underperformance against other EGBs is also noted, with the BTP/OAT spread tightening 6bps to 26bps this month.
- Tuesday was meant to be the final negotiation session on pension reform, but an additional meeting has been scheduled for next Monday after no consensus was reached.
- A reminder that openness to changes to the 2023 pension reforms were a key concession made by PM Bayrou in January to gain support from the Socialist party.
- Failure to reach an acceptable agreement could risk a censure motion, which the administration would likely struggle to survive.
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OUTLOOK: Price Signal Summary - Bear Cycle Extension In Gilts
- In the FI space, recent gains in Bund futures undermine a bearish theme and suggest the move down between Apr 22 - May 15, has been a correction. An extension higher would strengthen the reversal and open 130.86 next, the May 9 high. Further out, scope would be seen for a move towards 132.03, the Apr 7 high. Key short-term support has been defined at 129.13, the May 15 low. A break of this level would reinstate the recent bear cycle.
- A bear cycle in Gilt futures remains in play and recent weakness strengthens a bearish theme. 90.92, 76.4% of the Apr 9 - May 2 rally, has been cleared, paving the way for an extension towards 89.99, the Apr 9 low and the next key support. Resistance to watch is 92.30, the 20-day EMA.
US DATA: Mortgage Rates Again Spared Full Extent Of Swap Rate Increase
MBA mortgage applications fell 5.1% (sa) last week as mortgage rates increased for a second week although were again spared a sharper increase as mortgage rate to swap spreads narrowed again.
- MBA composite mortgage applications fell 5.1% (sa) last week after a 1.1% increase the week prior. They stand at ~50% of 2019 levels.
- Both new purchases and refis saw similar sized declines, with new purchases at -5.2% after 2.3% (61% of 2019 average) and refis at -5.0% after -0.4% (39% of 2019 average).
- The 30Y conforming rate increased 6bp after a 2bp increase the previous week, with 6.92% the highest since mid-Feb.
- However, mortgage lenders again didn’t fully pass through higher swap rates over this period, with the average 10Y swap rate over the week some 16bp higher after an 11bp increase the previous week.
- It sees the mortgage rate to 10Y swap spread at 296bp for a 19bp tightening from the 315bp in early May that had been its widest since Feb 2024.
US TSY FUTURES: BLOCK: Jun'25 10Y Ultra Sale
- -3,300 UXYM5 111-18, sale through 111-18.5 post time bid at 0702:00ET, DV01 $292,000.
- the 10Y ultra contract trades 111-19 last (-16.5)
