First round of French legislative elections: set ball saved, tie break in seven days. The outcome of the second round of these elections (7 July) is still wide open at this stage, as in most constituencies none of the contenders obtained more than 50% of the vote in this round (the number of constituencies in which not only two but three parties are eligible in the second round stands at c.55% of the 577 total seats in the National Assembly. The first reaction in the curves shows some relief in the market. In any case, we still think that this “reassuring” reaction may find its own floor given how blurred the political context currently is and the not-supportive fundamentals for debt (overall fiscal stance and supply/demand balance).
ECB’s Sintra forum: a new window for central banks’ communication strategy. This week’s ECB Forum on Central Banking to be held in Sintra may offer a good opportunity for central banks to elaborate more on their feelings about how the “way back to target” for inflation is progressing, not only in terms of the official “ongoing progress” mantra but also the nuances behind their views.
Curves outlook: debt fundamentals keep deteriorating. The c.10bp increase in long-term yields across the board could be interpreted as reflecting that step-by-step the market may now be positioning itself for a future scenario where the room for any significant improvement in the supply-demand imbalances is becoming smaller: A clear steepening profile is being seen across all curves (c.12/15bp over the past five days). In the case of the Euro curves this affects not only the 2Y/10Y but also the 5Y/10Y and 10Y/30Y. Long-term real rates are looking north, making up most of the previous week’s declines. This does not really reflect any meaningful risk-on mood.
Tactical approach on peripherals: i) markets will arguably maintain a prudent approach towards the second round of the French elections, and we do not expect any significant further spread tightening after the c.5bp observed this morning in the BTP-Bund spread; ii) in any case, we expect SPGB and PGB might still show stable or even better performance in RV terms vs. OAT; iii) from the supply side, only Spain will be active this week (with a new 7Y SPGB benchmark), but given the current positive market approach on Spain we do not expect any cheapening vs. other peripherals due to the supply factor.
Weekly supply. On the bills market total issuance will be c.EUR22bn in gross terms and c.EUR15.7bn in net terms (redemptions from Spain). In bonds Germany, Spain, France and Belgium will be active this week. Total issuance is expected to be c.EUR23bn in gross terms while almost flat in net terms (redemption from Italy and Germany).