SONIA: SFIZ5 96.20/25/30/35 Call Condor Lifted vs. 95.75/70 Put Spread

Estoxx 50 futures are off session lows but remain 2.8% below yesterday’s settlement levels, prompting a widening in 10-year EGB spreads to Bunds. BTPs underperform, with the spread to Bunds 7.5bps wider at 130bps (down from an earlier high of 132bps). The ratchet higher in EUR 3m10y swaption vol is likely factoring in here. BTPs are a popular vehicle for carry traders in the EGB complex, and the increase in margin requirements driven by heightened vol can contribute to unwinds in leveraged carry plays. 

• Italy is also more exposed to US tariffs than some of its EU peers, and the Government has been lobbying hard with the bloc to limit an escalation of trade tensions with the US.
• Together with France and Ireland, Italy successfully lobbied to remove retaliatory tariffs on US bourbon, wine and dairy imports in a package that will be voted on by the EC today. Meanwhile, Bloomberg reported yesterday that PM Giorgia Meloni will visit Washington, D.C., as early as next week in an effort to press the Trump administration to offer concessions on tariffs.
• The 10-year OAT/Bund spread is 3.5bps wider at 79bps, down from Monday’s intraday multi-month high of 82bps.
• This morning, Budget Minister Montchalin said that France will try and reduce its budget by E5bln to contain debt growth. This E5bln will be “cancelled, postponed or redirected”, with a portion going to “essential defence spending”.

Figure 1: 10-year BTP/Bund Spread vs 3m10y Swaption Vol

DBK (20th June) 19c, bought for 1.17 in 9k.

Gilt swap spreads are little changed to lower, proving a more sensitive to moves in U.S. peers than the German equivalents.

• 2-Year swap spreads widened in early trade, but have quickly faded towards late Wednesday levels, as the dovish move in the front end of the SONIA strip is fully accounted for on both sides of the spread and with 2-Year yields off session lows.
• Further out the curve, swap spreads are ~0.5-1.5bp lower vs. late Wednesday levels, but off early session lows, roughly replicating moves in outright bonds.