Off Relief Rally Bests, Spreads To Bunds Widen On Day, Knee-Jerk DFA Reaction Fades

The relief rally in EGBs, which came alongside some weakness in crude oil/global equity futures and the DFA’s Q4 funding announcement, has faded from extremes. The presence of EUR sovereign supply will have helped cap the rally, as will some stabilisation in crude/equity futures.

• Bund futures haven’t revisited early session lows, last -10. German cash benchmarks are little changed across the curve.
• The cuts in the DFA’s Q4 issuance plan were a little more sizable than estimates we had seen, although the EUR31bn reduction in issuance was tilted heavily towards bills (EUR23bn) as opposed to Bunds (EUR8bn), as expected.
• German ASWs widened a little on the issuance reduction (collateral scarcity feedthrough), but the moves there were relatively contained, moving back from extremes, with focus apparently on longer term narrowing drivers. As a reminder, Commerzbank had flagged their preference to add to ASW shorts on widening around the release.
• Still, the DFA announcement has helped biased EGBs wider to vs. Bunds. Peripherals lead that move, with Italian 10s widening by 4bp on the day.
• BTPs continue to struggle, with Italian fiscal headwinds and ECB QT discussions at the fore.
• The 10-Year Bund/BTP spread has hit multi-month wides. 10-Year BTP yields are moving towards YtD highs, with futures hitting fresh session lows in recent trade.
• ECB’s Muller (usually a hawk) once again noted that he is not expecting further rate hikes at present.