Goldman: OATs: Headwinds to Persist into 2023

Goldman Sachs note that “despite the recent repricing wider following the December ECB meeting, OAT-Bund spreads remain tight vs broader measures of interest rate and credit risk, even before accounting for headwinds that are specific to European sovereign credit.”

• “In particular, the combination of ECB policy tightening via QT, substantial funding needs by European governments and uncertain demand from foreign investors makes for a challenging environment for OATs.”
• “We thus expect the 10-Year OAT-Bund spread to widen to 60bp at year-end. With a slower debt consolidation in France against EMU peers, EU debt continuing to grow as a liquid alternative, and the potential for pockets of political uncertainty to appear, risks are in our view skewed towards even wider French spreads.”