Commerzbank: Backdrop For EGB Spreads Remains Mixed

Commerzbank write “the backdrop for EGB spreads remains mixed. Receding rate cut hopes amid prospects of persistently high issuance argues for a bottoming out in EGB spreads with 10y BTP and SPGB spreads vs. Bunds testing the lower bound of the ranges that are in place since early 2022.”

• “Bund swap spreads continue to tighten, which also compounds the upward pressure on SSA spreads amid record supply at the start of the year. As a consequence, the new on-the-run 10y KFW is trading at the cheapest level since the start of €QE in z-spread, i.e. even above the ca. +10bp levels marked at the height of the Covid stress in March 2020.”
• “In addition, the roll vs. the off-the-run seems to settle on a notably wider level, while pick-ups vs. Bunds (51bp in 10y) and semi-core EGBs are large. Bank Treasuries (LCR) should find wider ASW valuations, i.e. "Euribor plus", more compelling now, which should provide support.”