Macro context and the CB’s strategy: US: shifting from “if” there will be a landing to “what type of landing”, but not really contemplating a recession. The Eurozone presents a dull, low-growth profile extending forward, with still relatively limited risk of sliding into a recession. Not only pure monetary restriction but some structural (taking longer to resolve) factors are constraining domestic demand and consequently growth. The fight against inflation: definitely moderating, but are the extent and speed sufficient?
CB’s strategy: For the ECB, our base-case contemplates a 25bp cut in October but does not yet fully contemplate an additional cut in December (highly dependent on EMU and US macro data & the Fed’s s rates strategy). For FY25, we contemplate 75bp/100bp of additional cuts. An eventual additional move (125bp/150bp in 2025) could occur if the Fed finally gears up its easing cycle over and above our base case. As for the Fed, we expect 50bp of extra rate cuts through YE24 and a further 75bp/100bp in FY25. The risk in the rates outlook is biased towards a more aggressive rate-cutting cycle (arguably more in response to eventual market-related disruptive developments and/or geopolitics than to a material souring of the macro picture).
Euro rates direction: there may be some additional downward margin for the short-term rates (although contained). However, the long-term segments are already at the lower end of their range and even offer room to rebound in the medium term. We see Bund yields building a floor around (albeit not significantly below) 2.0% and over time (1H25) setting up a range around 2.10% -2.40%. We do not see any attraction in taking long-duration positions at current interest rate levels except in a risk-off market context (financial turmoil? escalation of geopolitical risk?). This would be consistent with the US10Y Treasury yield in a range of 3.7-4.10% in 1H25
Peripheral sovereign issuance: looking ahead to 2025. Italy: we expect c.EUR70-75bn of m-l term net supply (equivalent to c.EUR315bn of gross supply) and a relevant increase in net recourse to the institutional market in absolute terms vs. the 2024 figure (c.EUR100bn vs. c.EUR65bn). Spain: our initial estimate is that gross bond issuance could be limited to c.EUR160-165bn while net issuance could be EUR45-50bn with an overall recourse to the institutional market of cc.EUR90-95bn). Portugal: we expect a net bond supply of c.EUR5,5bn, making the overall net recourse to the institutional market c.EUR12bn.
Peripheral spreads: In 4Q24, we do not see any potential market drivers that might trigger a structural underperformance of peripherals vs. other EGBs. For 2025 the drivers that might potentially affect spread dynamics include: i) central banks’ rate-cutting cycles and related dovish market expectations will mitigate the eventual upward adjustment of peripherals’ spreads; ii) the stronger macro performance of peripheral economies will arguably be confirmed in 2025, supporting a positive market attitude toward Spain and Portugal in particular; iii) a less positive supply/demand imbalance vs. the previous year might put some pressure on credit performance, particularly for Italy; iv) in contrast, the rating agencies’ overall momentum is positive for peripherals. The core-periphery 10Y spread target by the end of 1H25 is 85bp for Spain, 145bp for Italy and 55bp for Portugal