CONSUMER STAPLES: Reckitt; valuation comes lower than expected

The presence of this morning’s Bund supply helps promote continued underperformance for 10s on the 5s10s30s butterfly.

• 10s sit at the cheapest level witnessed since December ’22 on that structure, with Bunds taking the brunt of the selling stemming from the tabled loosening of German fiscal policy.
• This comes as Bunds provide the most liquid point on the German curve and also probably reflects expectations surrounding the maturity makeup of issuance to fund any spending increases.

Fig. 1: Germany 5-/10-/30-Year Butterfly

Source: MNI - Market News/Bloomberg

EGBS: Adjustments to an apparent moderation in U.S.-Canada trade tensions and the presence of this morning’s 10-Year German supply leaves EGB spreads to Bunds 0.5-1.5bp tighter.

• The recent theme of spread tightening has largely been a function of the shift in expectations surrounding the German fiscal situation, while other nations are generally expected to lean more on taxes/EU funding vehicles when it comes to financing increases in their defence expenditure.
• 10-Year OAT/Bunds has pushed below 70bp for the first time since September in recent days, although the moves below that level haven’t been particularly forceful, last 68.6bp. Current levels would represent the lowest close in the spread since July.
• 10-Year BTP/Bunds hasn’t managed a clean break back below 110bp, with cycle closing lows located at 105.4bp.
• PGBs lag peripheral peers at the margin after the expected ousting of the Portuguese government and with 10- & 13-Year paper set to be auctioned this morning. The German fiscal outlook and sound Portuguese fundamentals continue to limit widening episodes vs. Bunds.

ERM5 97.9375/98.0625 cs Bought for 2.25 in 5k.