Natixis: Is The Stability Of Sovereign Spreads Sustainable For Q423?

Natixis note that “the low volatility environment for sovereign spreads has been confirmed during Q323. The BTP-Bund 10Y spread has been trading in a 160-180bp range since June, which is below the 2022 average.”

• “Q4 is likely to be more challenging for sovereign spreads, especially in Italy. “
• “The question whether the ECB QT will be extended to PEPP is spreading.”
• “The outlook for Italian GDP growth in 2024 is now more challenging.”
• “Deficit forecasts are likely to be revised upward.”
• “Italian economic fundamentals have improved since Covid-19. However, we recognize that structural weakness remains in the coming years.”
• “We expect the BTP-Bund 10Y spread to trade around 160-180 bps in Q423 with a gradual widening of BTP-Bund to 200bp by end of Q124.”
• “Positive factors are still supportive for BTPs: (1) carry (2) the third tranche of the NGEU program has been validated by the European Commission (3) net supply issuance for Q4 is negative (4) the volatility in spreads is likely to stay low (5) a smooth QT on PEPP would not contribute to a significant spread widening.”
• “The risk to this view is that the market’s focus can suddenly change to deteriorating fundamentals as well as political uncertainty, which could result in a BTP-Bund 10Y spread of around 210-230bp.”