GGB/Bund & GGB/BTP Spreads Stabilise Around Cycle/All-Time Tights

Our political risk team highlight the likelihood of the ND Party achieving a majority in the upcoming second-round of the Greek election (voting takes place on Sunday).

• When it comes to ND’s policy direction, a broadly pro-business environment would be maintained while seeking to ensure Athens remains on the EU’s good side with regards to keeping a close eye on the budget deficit and government debt levels.
• This has allowed the idea that Greece could quickly achieve IG status via sovereign rating upgrades to become more forceful in recent weeks, although the related review calendar suggests that such a move wouldn’t be imminent (we could get some ad-hoc adjustments).
• We also remind you that the major bond tracking indices have varying adjustment methods when it comes to index inclusion, meaning that one sovereign rating upgrade would not be enough for broader index inclusion for GGBs.
• This, coupled with the recent hawkish adjustment in ECB pricing and the already notable scope of GGB compression, has probably limited the 10-Year GGB/Bund spread from moving much below 125bp on a closing basis (the lowest level seen since ’21), while the 10-Year GGB/BTP spread operates a little above all-time tights as GGBs trade comfortably through their Italian counterpart.
• GGBs could come under further tightening pressure post-election, but it’s always hard to assess what is already priced on that front.

Fig. 1: 10-Year GGB/Bund & GGB/BTP Spreads (%)

Source: MNI - Market NEws/Bloomberg