SWEDEN: TT: Govt To Present SEK17.5bln of Budget Relief

OATs marginally outperform EGB peers (ex-Ireland) this morning, with the 10-year OAT/Bund spread 0.5bps narrower at 64bps. Moody’s deferred a ratings assessment in its periodic review on Friday, meaning a downgrade was avoided (Current rating Aa3, Outlook Negative). However, with political/fiscal risks set to come back to the fore in H2 2026, scope for the 10-year OAT/Bund spread to return to early-2024 levels (i.e. before Macron’s snap election announcement) may be limited.

• Moody’s periodic review write-up contained unsurprising themes:
  • “The fiscal deficit of 5.1% of GDP in 2025 came in below our expectations of 5.4%, making the 5.0% deficit target in 2026 more achievable. “
  • “That said, the 2026 budget does not provide any clarity on the measures to reduce the deficit beyond this year. We continue to see significant risks that France's political parties will not be able to agree on further consolidation measures for 2027 and beyond”
  • “Furthermore, the rise in France's government borrowing costs in the wake of the conflict in the Middle East poses risks to our forecast for the government's debt affordability metrics”
• Overall, a downgrade could be issued if France faces “continued difficulties to materially reduce the fiscal deficit and contain the expected weakening of the government's debt burden and debt affordability metrics. A lasting pause or reversal of key provisions of previous structural reforms, most notably on pensions, would also add to downward pressure on the rating.”
• Moody’s next scheduled review of France’s ratings is October 23. 

Gilts initially weakened on the stagflationary backdrop provided by the breakdown in the U.S.-Iran negotiations, although questions over the viability of the U.S. blockade of the Strait of Hormuz and the potential for some form of deal to emerge over the medium to longer term see bonds back from lows.

• Gilt futures trade as low as 88.24 before recovering to ~88.40, with bears still unable to close Thursday’s opening gap higher (88.03). A break below there would expose key near-term support at 87.59.
• Yields little changed to 1bp higher across the curve, light flattening seen. Bulls have been unable to force conclusive breaks back below the March 18 yields lows, leaving bears in technical control.
• SONIA futures off lows, last 0.5-4.5 weaker on the day, while BoE-dated OIS prices ~46.5bp of hikes through year end vs. ~45bp late on Friday.
• Expect geopolitical tensions to continue to dominate in the immediate term.
• The impact of the war in the Middle East was not too evident in the KPMG-REC Report on Jobs that was released overnight. Note that data was collected 12-25 March (see recent bullet for greater details there).
• UK monthly GDP data is due on Thursday, but that shouldn’t be a meaningful market mover, particularly as it covers the pre-Iran escalation period (February).
• Elsewhere, 6 MPC members will speak this week.

While Brent crude oil respected lows, some of the initial risk-off/stagflationary move that came at the Asia open has faded, with bonds, equities and gold off lows, while crude and the broader USD are back from highs.

• Headline flow remains relatively light since the start of European/London trade.
• Questions over the viability of the U.S. blockade of Hormuz (on top of the well-documented pre-existing limitations to Hormuz transit) and the full restoration of Saudi Arabia East-West pipeline capacity are noted when it comes to the pullback in oil.
• Meanwhile, U.S. President Trump’s affinity with cutting deals and the related ‘TACO’ trade may also be playing a part. A reminder that the WSJ has reported that the Trump administration is currently weighing limited strikes on Iran in a bid to force Iran back to the negotiating table.