Goldman: Ongoing Tension Between Duration Sell-Off And Sovereign Spread Widening

Goldman Sachs note that their “European cross-asset macro pricing framework shows that policy repricing has defined the last and latest leg of the Bund sell-off.”

• “Some of this may have resulted from spillovers from the U.S., but we also think shifting expectations around the potential for an earlier runoff of PEPP holdings is a plausible explanation.”
• “However, we note that the spread widening in Italy (also due to deteriorating fiscal fundamentals) has coincided with a drop in growth pricing in Europe.”
• “This suggests that further spread widening from here - something we expect as 10y BTP-Bunds head towards our 235bp target - will further weigh on growth pricing, skewing the risks for core yields lower.”
• “Ultimately, lower core yields, as inflation falls throughout 2024, will alleviate the pressure on spreads, but we expect this tension to remain in place through end-2023 given that ECB speak so far has not yet leaned against the rise in either yields or spreads.”
• “We continue to think the hurdle is relatively high for rate cuts, in line with our economists rates forecasts (for one cut in Q4 2024).”