Some considerations as we plunge into 2Q. Central banks: the job is not done yet: The more macro data is released, the more evidence there is to support the central banks’ view that the fight against inflation is not yet over. The markets only appear to partially believe the message sent out by central banks of “higher-for-longer rates”. The part more readily accepted by participants is the “higher” component. However, the part where markets show clear scepticism is the “for longer”.
Asset valuations seem to have found sufficient reassurance in the expectations that central banks will bend to circumstances if needed in the future. this may suggest some underweighting of the risks that are still outstanding: this may be due to not only the “known unknowns” (eventual new episodes of “confined” financial stress ahead?), but also following the confirmation that central banks are not in the mood to provide the kind of market-friendly conditions (mid-term rates and liquidity strategies) that the markets now seem to be discounting.
As for the short-term market dynamics, none of these “potential threats” seem to be relevant at the moment. In directional terms, real rates still look very subdued . In slopes, the “dovish” approach may also translate into some renewed flattening bias. Asset swaps are also correcting the spread-widening seen in early March, but still show some legacy effects. the short-term dynamics of these spreads will be highly influenced by overall financial risk perception and will thus show close to 100% correlation with financial credit spread indices, which may still be sticky around current levels. Looking further ahead into 2Q23, we believe that liquidity and real rates dynamics will become the main driver of these spreads
Periphery outlook. Widespread decreases in yields have been the norm for both core and peripherals, the US labour force data on Tuesday has contributed to boosting the overall performance of yields, pushing them near the lower bound of this year’s trading range. Last week, the Italian Treasury launched a new 8Y long Green BTP with an excellent market reaction, investor participation and execution (the book indicated a very high quality and geographical diversification). Last week some concerns arose about the Italian Treasury’s level of liquidity in March (the lowest level since April 2012). Our take is that: i) not looking at the liquidity data over the last three years for reference; ii) the Treasury, in its 2023 public debt guidelines, stated its intention to strategically “minimise the amount deposited in the availability account”; iii) the Italian Treasury’s deposit account shows a significant seasonality effect, with the first and the last quarter of the year the most exposed in terms of cash absorbing; iv) in March bond redemptions (EUR44bn) have been the second highest level since March 2012. Lastly, the Italian government is going to approve its first Economic and Financial Document (EFD) today and it is expected to increase its forecast real growth rate for this year to 1% from 0.6%.
About Spain and Portugal, both countries featured similar trends in yields, with the largest yield decrease in the 2Y-3Y area (c.12bp) and the worst relative performance vs. core in the 15Y-20Y area. The IGCP announcement about the cancellation of this week’s auction increases the probability of seeing a syndication in April (likely the 10Y benchmark). In terms of slopes, the picture is quite mixed among peripherals and across the curve (resulting in a relevant widening in the box IT-SP 2Y-5Y). Regarding the long-end, we note that issuers have chosen to be quite conservative in the choice of bonds offered in this week’s auctions, tapping off-the-run bonds in order to fill specific market shortages (Italy on BTP Feb 2037 and Sept 2044, Spain on SPGB July 2042). In this sense, we expect the supply pressure on these areas for Italy and Spain this week to be almost negligible.
Weekly supply: on the bills market, Belgium, France and Spain (today) and Italy (Wednesday) will be active. Total issuance will be c.EUR21.7bn in gross terms but c.EUR14.75bn negative in net terms. On the bonds market, Germany, Spain and Italy will be active (both on Thursday, Spain on the 3Y, 10Y benchmarks, 20Y off-the-run and 10Y linker, Italy on the 3Y, new 7Y, 15Y and 20Y area bonds). Total issuance will be c.EUR21bn in gross terms and c.EUR2.5bn in net terms