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EGBS: OAT Outperformance Vs. Iberians Stalls

EGBS
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Looking a little more broadly than the spread to Bunds, the mid-January richening for French paper on the 10-Year SPGB/OAT/PGB butterfly has seemingly stalled.

  • This suggests that the latest leg of tightening seen in OAT/Bunds (since the middle of last week) has been more of a broad EGB spread tightening move, as opposed to an OAT-driven move.
  • The structure last trades at -45.2bp vs. a January closing high of -44bp, with the December closing high at -41.6bp remaining intact.
  • Relative Spanish & Portuguese credit rating trajectories and fiscal situations (outside of short-term Spanish spending on flood relief) will likely prevent meaningful OAT outperformance on the structure as long as French fiscal and political risks remain evident.

Fig. 1: 10-Year SPGB/OAT/PGB Butterfly (bp)

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Looking a little more broadly than the spread to Bunds, the mid-January richening for French paper on the 10-Year SPGB/OAT/PGB butterfly has seemingly stalled.

  • This suggests that the latest leg of tightening seen in OAT/Bunds (since the middle of last week) has been more of a broad EGB spread tightening move, as opposed to an OAT-driven move.
  • The structure last trades at -45.2bp vs. a January closing high of -44bp, with the December closing high at -41.6bp remaining intact.
  • Relative Spanish & Portuguese credit rating trajectories and fiscal situations (outside of short-term Spanish spending on flood relief) will likely prevent meaningful OAT outperformance on the structure as long as French fiscal and political risks remain evident.

Fig. 1: 10-Year SPGB/OAT/PGB Butterfly (bp)

Keep reading...Show less