Where do we stand? Where do we go? Putting things into context (if possible). In our view, the most relevant element to watch in the current circumstances is the possibility of financing flows being disruptive at the very crux, i.e. Interbank wholesale market: the c.6-8bp of spread widening observed between the USD SOFR rate and that paid on reserve balances is reflecting some initial traces of “loss of confidence” in the funding market. In our view, it may be this sort of circumstances (big financial stress) and its potential non-linear impact on asset valuations and thus on macro variables, one of the main factors that could spur some “discipline” in Trump’s strategy (at least we see this more effective than the mere “retaliation game rhetoric at this stage).
CB’s: not only whether, but really how to step in. The ongoing tightening of financial conditions will very likely nudge CB’s to act dovishly. In the case of the Fed, all the financing conditions indexes existing suggest that we are back to the Silicon Valley Bank episode (some even back to Covid era). ECB: one of the main snippets extracted from the accounts of the ECB meeting in March is that the overall feeling within the GC was that the cut of the DFR to 2.50% brought rates to neutral. This would accordingly shift the discussion about next steps away from where the neutral level stands but really to how deep into accommodation rates must be pushed.
Curves outlook: bull steepening as part of the ongoing Trump/Markets tussle. Yields all across are looking south on the back of safe-have linked flows. We recall that according to our models, the main reference that should definitely play as a floor (otherwise a change of scenario would usher in) stands around 2.30%. This should be consistent with some further steepening in the 2y/10y and 5y/10y. Conversely, we note some resilience to steepening in 2y/5y and 10y/30y. In RV terms we now see the 5Y area the most benefitted one fly terms whereas the 15y area would now feature the most vulnerable
US tariffs and Peripherals Outlook. The US tariffs are affecting (and will affect) peripheral spreads through different channels (global market risk-off mood, growth concerns, ECB market expectations, higher issuance concerns, more cautious rating agencies).
Sovereign rating. Fitch affirmed Italy (BBB, Positive outlook). Next Friday, Fitch on Spain (A-, Positive outlook) and S&P on Italy (BBB, Stable outlook)
Our tactical approach on peripherals. i) Given the spike in market volatility and the high level of uncertainty, regarding peripheral spread we expect for Spain vs. Germany to stabilise in the 70bp-75bp area, while Italy should dive into 120-130bp area (consistent with the relevant cap level at 130bp in ASW terms). ii) In terms of slope, from a pure tactical/short-run perspective, we think that after the recent steepening in the peripheral credit curves, flattening positions in the 2Y-10Y area might perform decently both in case the risk-off will continue (with the risk that part of the risk and outflows will hit short-end of peripheral curves) or if a rebound will arrive.
Weekly supply. In the bill market, total issuance will be c.EUR29.7bn in gross terms and EUR13bn in net terms. In bonds, the Netherlands, Germany, Austria, Portugal, Spain and Italy will be active this week (gross issuance is expected to be c.EUR24bn and EUR1bn in net terms).