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BNP: BTPs To Continue Outperforming Bonos

BONDS

In a note today, BNP Paribas writes that Italy is better able than Spain to withstand "the headwinds ahead".

  • Poltiics / fiscal support likely favour Italy over Spain, with the Spanish economy set to be "a clear underperformer" at least until end-2021 - esp as COVID lockdown more likely to weigh on Spain's relatively services-dependent economy vs Italy manufacturing.
  • They see periphery spread tightening to continue but "at a slower pace, given already low spreads and yields", with BTPs outperforming Bonos "on the back of the anticipated increased ECB pandemic asset buying programme, buying from Japanese investors and valuation."
  • On PEPP impact: "Although Spain is ahead of Italy in terms of realised gross supply, the remaining 2020 net supply net of QE is more much negative for BTPs than Bonos."
  • More specifically, BNP sees outperformance of long-dated BTPs, both vs Bonos and very short-dated BTPs.
  • Therefore they advise: to 'keep' BTP 10s30s flatteners targeting 85bps (currently 95bps); 'keep' short Oct-30 Bono vs Apr-31 BTP targetting 37/38bps (currently 58bps); but 'book profits' on long Oct-30 Bono vs Feb-30 Bund.
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