Goldman: The Retail Bid Can Only Get You So Far

Goldman Sachs note that “as European sovereign credit continues to tighten, we look at the role of retail demand. We find that the build-up in households' BTP holdings has been somewhat more front-loaded in this ECB hiking cycle and can likely continue - albeit at a declining pace - given the historically low household allocation to fixed income.”

• “We are, however, sceptical that this retail bid can be a key driver of sovereign credit performance. Rather, we see the broad improvements in the cyclical outlook and risk environment as the engine of the recent repricing, in part through creating a favourable backdrop for carry trades.”
• “Going forward, we see risks increasingly tilted towards sovereign spread widening, with ECB QT likely to weigh on the asset class, and an increasing onus on domestic growth performance to support valuations.”
• “Within the periphery complex, we think Bonos are likely to be more protected against a change in the cyclical backdrop, compared with BTPs.”