Goldman: Core Rate Relief For Sovereign Spreads

Goldman Sachs write “an implication of the faster rate of policy rate cuts that we now expect is an easier trading environment for sovereign credit.”

• “Though there are limited comparable episodes, the positive relationship between sovereign spreads and front-end forwards at the start of the hiking cycle suggests that sovereign credit will perform better than we anticipated.”
• “More pro-active ECB policy easing also likely limits the downside to GDP growth, and if we are right that stronger growth will not prevent the ECB from easing, sovereign credit will benefit from both growth and policy tailwinds.”
• “That being said, we have made only modest revisions to our 10y Bund yield forecasts, and we expect ECB QT to accelerate through 2024.”
• “That suggests that headwinds remain, especially into the turn of the year as investors position for heavy bond supply, skewing the near-term risk towards spread widening.”
• “We revise our end-24 10y BTP-Bund, Bonos-bund, and OAT-bund spread forecasts to 175bp, 80bp, and 55bp, respectively (from 200bp, 90bp, and 60bp before).