INR: USDINR Extends Fall From All-Time Highs as US-India Tensions Thaw

SFRU5 5K given at 95.9025.

Goldman Sachs note that “a week of choppy price action left European yields slightly higher. The approach of September should see the bond supply picture come increasingly into focus, especially in Germany given the mid-year revision to the Finanzagentur’s issuance plan. While elevated debt issuance (combined with ECB QT) is one of the reasons we expect higher Bund yields over time, we think a broader shift in macro expectations will be a key ingredient to higher yields”.

• They go on to flag that “although term premium has sustained a meaningful portion of the post-German election reset higher, the rate expectations component of yields - even as far out as 10s - remains somewhat lower. If - as our economists expect - sustained fiscal support leads to a multi-year period of above-potential growth in Germany, we think this short-rate reassessment is likely to prove too pessimistic”.
• Ultimately, they flag that “while that may take time and evidence to fully play out, we think there is value in positioning for near-term ECB cut pricing to decay and continue to like ERZ5 shorts against longs in the U.S.”.

The 10-year BTP/Bund spread has tightened almost 2bps back to ~78.5bps this morning, even as European equity futures decline 0.7% and 3m10Y EUR rates vol consolidates Friday’s 2.5bp increase. 

• BTPs were an underperformer alongside OATs during Friday’s sharp EGB bear steepening, but have notably outperformed French paper to start week. The 10-year BTP/OAT spread is 1.5bps tighter at 10bps, the tightest since 2005.
• Over the weekend, Italian Deputy Finance Minister Leo said that the government plans to reduce tax on middle class earnings in the 2026 budget. He noted that “the goal remains tax cuts that are compatible with public accounts”.
• The 10-year IRISH/Bund spread is marginally tighter at 23bps, after Moody’s affirmed Ireland’s sovereign rating at Aa3 on Friday, and retained its Outlook as Positive. The risk was for an Outlook downgrade to Stable.
• The agency noted that while “risks to Ireland's economic and fiscal strength have increased relative to our August 2024 expectations”, “Ireland has already significantly outperformed our expectations for debt reduction from when the outlook was changed to positive” at that time.
• Eurozone June trade data is due at 1000BST, but more focus is on headline flow stemming from Ukrainian President Zelensky’s meeting at the White House later.