Goldman: Sovereign Credit Spreads Resilient To Duration Repricing

Goldman Sachs note that “sovereign spreads have weathered the recent sell-off in global yields relatively well.”

• “That said, we see scope for renewed investor attention on the asset class going into Q4.”
• “First, in the wake of the U.S. repricing, fiscal questions have gained market relevance, and European governments are working on their 2024 budget plans for submission to the European Commission by the fall.”
• “Similarly, delays in the implementation of recovery fund investments present the risk of slower disbursements of EU funding as well, with €16bn worth of EU funding to Italy at risk by the end of 2023.”
• “Second, we expect the ECB to debate a possible acceleration in the QT pace.”
• “And finally, political uncertainty has increased in Spain following the general elections, with actual government formation still looking some ways away, given the uncertain support from regional parties.”
• “In that context, we maintain a widening bias in sovereign credit, especially in BTPs, which are likely most exposed to a change in sentiment.”
• “On Spain, despite the near-term uncertainty we do not expect the eventual outcome of Spanish elections to be market unfriendly, and as Bonos continue to lag the year-to-date moderation in rates vol, they should be relative outperformers during a bout of sovereign credit widening.”