OUTLOOK: Price Signal Summary - Corrective Pullback In Bunds

Latest from Italian PM Meloni: "*MELONI: ITALY TO REACH 2% OF GDP DEFENSE SPENDING GOAL IN 2025" bbg

• For context, the Stockholm International Peace Research Institute estimated that Italian defence expenditure totalled E38bln in 2024, corresponding to 1.6% of GDP.

Hard data won't capture the economic fallout of Trump's tariff wave until the middle/end of this month, without which the Euribor-implied terminal yield (corresponding to the H6 contract) may struggle to move toward 1.50%.

• The H6 implied yield has fluctuated between 1.60-1.70% through the last three weeks. Although tariff- (and more recently, German fiscal-) related headlines continue to spur intraday volatility, they have not changed the macroeconomic picture enough to promote meaningful range breakouts in either direction.
• The ECB has clearly signalled that growth risks stemming from US tariffs are tilted to the downside, and that the June GDP growth projections will likely be revised lower relative to March.
• But these downside risks still need to be realised in the hard data - which will only begin capturing the US April 2 tariff announcement and associated fallout from the middle/end of this month.
• Meanwhile, German fiscal/defence spending headlines have come back into focus in recent days, following Merz’s (difficult) confirmation as Chancellor yesterday. Should defence spending ramp up more quickly than markets expect and subsequently provide a tailwind to growth and inflation. This may temper expectations for a Euribor-implied rate below 1.70%.
• Current prices can be interpreted as a weighted average of all possible outcomes. Recent H6 options flow underscores this range of outcomes/opinions:
  • Today’s flow has seen H6 calls outnumber puts by 50-to-1, with dovish spread/fly structures targeting an implied yield of 1.125% and below.
  • However, last week’s standout flow was 30k of ERH6 98.5625/98.1875 1x2 put spreads, bought for 5-5.75 across the week.

Option desks reported mixed SOFR & Treasury options overnight, leaning towards low delta put structures on modest volumes. Underlying futures weaker in the short end, curves twist flatter in the lead-up to today's FOMC annc. Projected rate cut pricing looks steady to mildly lower vs. late Tuesday levels (*) as follows: May'25 steady at -0.5bp, Jun'25 at -8.2bp (-8.4bp), Jul'25 at -23.8bp (-25.2bp), Sep'25 -43.8bp (-46.2bp).

• SOFR Options:
  • 4,000 SFRZ5 97.50 calls ref 96.445
  • 5,000 SFRU5 96.12/96.50/96.68 1x3x2 broken call flys ref 96.145
  • 2,000 SFRN5 95.87/96.12 put spds vs. SFRU5 95.62/95.81 put spds
  • 3,800 SFRK5 95.68 puts ref 95.78 to -.785
  • 1,250 0QM5 97.00/97.75 call spds vs. 2QM5 96.93/97.68 call spds
  • 4,000 0QK5 96.50/96.62 put spds ref 96.785
  • 1,500 0QM5 96.31/95.56 put spds ref 96.80
  • 2,000 0QM5 97.12/2QM5 97.00 call spds
• Treasury Options:
  • over 3,000 wk2 TY 110.5/111.75 strangles ref 111-07.5 (exp Fri)
  • 6,700 TUN5 103.25/103.5/103.62/103.75 put condors ref 103-30.75
  • 2,000 FVN5 106.5/107.5 put spds vs. 109/110 call spds
  • appr 10,000 TYM5 110 puts, 7 last
  • 2,500 TYM5 109/110 put spds, ref 111-08
  • over 3,400 TYM5 111.5 calls, 31 last