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EGBS: Defense Spending Expectations Weigh, Germany Underperforms

EGBS
BulletEurozoneFixed Income BulletsMarkets
  • EGBs closed lower across the curve, led by a sizeable sell-off in Bunds at the open on the back of higher defense spending expectations in the event of a US-brokered peace deal between Russia and Ukraine.
  • Those moves mainly held for German paper, keeping to a narrow range as 10Y yields didn't want to retreat too far after an unsuccessful attempt to push above 2.50%.
  • Other major EGBs saw a greater paring of those early losses however, with spreads more than reversing Friday’s widening with support from the EuroStoxx 50 climbing 0.5%.
  • BTP-Bund spreads saw the most notable tightening, to 105.8bps (-3.2bp) and close to Thursday’s 105.5bp that marked fresh recent lows.
  • Germany 2Y +2.3bps & 10Y +5.7bps, France 2Y +1.2bps & 10Y +3.8bps and Italy 2Y -0.4bps & 10Y +2.6bps.
  • Swap spreads: Long-end German ASWs meanwhile have more than reversed Friday’s widening, with the Bund ASW vs. 3-month Euribor 4bp tighter and the Buxl ASW 4.5bp tighter.
  • The prospect of debt brake reform following the election result (the probability of which depends on the eventual composition of the Bundestag) presents a key near-term risk to ASWs, even if the implementation of any reforms would likely take some time.
  • We pencil in a 30-year Bund syndication for this week but our conviction is increasingly waning ahead of the election.
  • ECB speak has seen pre-eminent hawk Holzmann viewing “some” probability of a March rate cut, sufficiently loose compared to the 98% of a 25bp cut priced to have seen Germany 2Y yields rise 1bp post-comments.   
  • Bundesbank’s Nagel meanwhile noted a tariff scenario where the level of German GDP would be circa 1.5pps lower by 2027.
  • ECB Executive Board Member Cipollone will peak on the ECB's balance sheet at an MNI Event tomorrow at 1400GMT/1500CET (sign up here). 
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  • EGBs closed lower across the curve, led by a sizeable sell-off in Bunds at the open on the back of higher defense spending expectations in the event of a US-brokered peace deal between Russia and Ukraine.
  • Those moves mainly held for German paper, keeping to a narrow range as 10Y yields didn't want to retreat too far after an unsuccessful attempt to push above 2.50%.
  • Other major EGBs saw a greater paring of those early losses however, with spreads more than reversing Friday’s widening with support from the EuroStoxx 50 climbing 0.5%.
  • BTP-Bund spreads saw the most notable tightening, to 105.8bps (-3.2bp) and close to Thursday’s 105.5bp that marked fresh recent lows.
  • Germany 2Y +2.3bps & 10Y +5.7bps, France 2Y +1.2bps & 10Y +3.8bps and Italy 2Y -0.4bps & 10Y +2.6bps.
  • Swap spreads: Long-end German ASWs meanwhile have more than reversed Friday’s widening, with the Bund ASW vs. 3-month Euribor 4bp tighter and the Buxl ASW 4.5bp tighter.
  • The prospect of debt brake reform following the election result (the probability of which depends on the eventual composition of the Bundestag) presents a key near-term risk to ASWs, even if the implementation of any reforms would likely take some time.
  • We pencil in a 30-year Bund syndication for this week but our conviction is increasingly waning ahead of the election.
  • ECB speak has seen pre-eminent hawk Holzmann viewing “some” probability of a March rate cut, sufficiently loose compared to the 98% of a 25bp cut priced to have seen Germany 2Y yields rise 1bp post-comments.   
  • Bundesbank’s Nagel meanwhile noted a tariff scenario where the level of German GDP would be circa 1.5pps lower by 2027.
  • ECB Executive Board Member Cipollone will peak on the ECB's balance sheet at an MNI Event tomorrow at 1400GMT/1500CET (sign up here).