The end of the central banks’ “put” on duration risk?
The last few weeks have helped fixed-income participants take a reality check regarding the risk of duration positions and central banks’ role in this. In the second half of September, a reassessment of the upper bounds of these ranges took place.
Our outlook for yields has not changed dramatically: i) our medium-term outlook that contemplates further room for upward adjustment in real rates remains valid; ii) given the speed of the recent movement, it is reasonable to expect that we may now enter a phase of less steady upward movement (somewhat more erratic) as the markets are vigilant to any new information.
Our strategic/tactical approach to the euro curves is as follows:
Over the last few weeks, the ESTR curve has reassigned probabilities in relation to the ECB’s rates policy timeline in line with our expectations (less dovish), but we still see room for further adjustment; ii) we cannot discard the possibility of some “floor testing” of nominal rates. We see the odds of a sharp/consolidated breach of 2.70% as somewhat reduced at this stage and we consequently see this as an opportunity to position for a rebound going forward; iii) We still see room for some spread widening between US and EUR core long-term yields (and particularly real rates). iv) We still like dis-inversion/flattening positions in the EUR swap curves, not only in the 2Y/5Y or 2Y/10Y references but also along the 5Y/10Y slopes (the latter, which is now standing fairly flat, could make some inroads into positive slope territory over the next few weeks). v) We shift focus to the shorter tenors for receivers s positions; vi) we still expect an asset-swap compression movement in the core curves (we prefer ASW compression trades in the 2Y-5Y area of the German curve)
Italy: update on the Economic and Financial Document (2023) and the 4Q23 issuance plan
Nadef: i) the overall fiscal stance seems to be deteriorating (reduction in the real growth rate, increasing deficits and net borrowing requirements, debt-to-Gdp ratio stable); ii) few information about the delay in the RRF implementation plan (now the bulk of the investments is mentioned to be in 2025-2026); iii) relevant increase for next year “net cash borrowing requirement for the State Sector” (at this stage, our first guess for 2024 net issuance in the medium-long term tenors is c.EUR90bn area).
4Q23 issuance plan: i) implicit upward revision of its FY23 funding target by c.EUR15-20bn; ii) given the good start of the issuance of the new BTP Valore this morning, we expect a negative recourse to the institutional market for the rest of the year to EUR8bn.
Tactical approach on peripherals.
- Given the good start to the issuance of the BTP Valore, there might be room for EUR10bn of net buyback operations from the Treasury in the coming few weeks. After the relevant steepening of Italian credit risk, we suggest to trade the flattening of 1Y vs. 5Y.
- We are now inclined to believe that the Spanish 15Y is weak enough to trade it long vs. 10Y and 30Y. If the Treasury decides to offer a new 15Y linker benchmark, the element of potential supply pressure will disappear and the next expected syndication for 1Q24 is expected to be a new 10Y and 30Y benchmark.
Weekly supply
On the bills market total issuance will be c.EUR18.5bn in gross terms, while in net terms it will be c.EUR6.6bn. In bonds, core markets will see Austria Germany France active whereas Spain (new SPGB 5Y, and 10Y and 20Y SPGBs) and Italy (a new retail-BTP Valore ) will be active. Total issuance is expected to be c.EUR29.8bn in gross terms and c.EUR13.3bn in net terms. Since the Spanish Treasury has decided not to offer a linker in this week’s auction, speculation about a new 15y linker syndication has increased.