EU-Bonds Off Early Wides As Initial MSCI Index Decision Is Digested

EU paper initially widened vs. core & semi-core EGBs following MSCI’s decision to not include EU-bonds in their government bond indices at this juncture, although spreads are already off early session wides.

• The 10-Year EU/Bund spread was ~4bp wider, while the 10-Year EU/OAT spread briefly moved back to flat after French political uncertainty allowed EU paper to trade at a near double digit bp premium to OATs earlier in the week.
• Most market participants expected MSCI to include EU-bonds in their government bond indices, although the passage of time since the end of May (when the results of the consultation were supposed to be published) had generated some discussions around the potential for a delay to MSCI index inclusion.
• Intra-EU divergences of opinion on centralised debt add a political element to related discussions
• The key question will be how this decision impacts other index providers.
• ICE enacted their consultation on the same matter ahead of MSCI, with results due in August.
• The fact that EU/EGB spreads have already moved off session wides suggests that most still expect government bond index inclusion at some point, aided by MSCI revealing that they will “re-evaluate the eligibility criteria (for EU-bonds) in Q225.”
• A reminder that a ’23 EU survey suggested that index inclusion is ““the single-most important remaining step in order for EU-Bonds to trade and price similarly to EGBs.”
• Commerzbank note that “while it is unclear whether this will serve as a blueprint for ICE, the initial reaction of EU-bonds is likely to be bearish, given how EU-bonds reacted to the MSCI's initial announcement. Versus OATs, however, we believe that politics will weigh much heavier so that EU outperformance should resume after the initial setback.”
• Citi strategists warned of a sharp repricing for EU paper, suggesting that MSCI’s decision does “not bode well” when it comes to the prospect of EU-bond inclusion in ICE’s government bond indices. Citi also warned that MSCI’s announcement may prevent other index providers from announcing similar consolations in the near-term.

Source: Bloomberg