Buy SPGB 0.00% 1/28 and BTP 0.95% 6/32 vs. Sell SPGB 5.75% 7/32 and BTP 2.65% 12/27: currently trading at c.29.3bp, target 20bp (stop loss 35bp).
In November, the 3Y-10Y area of the Italian curve steepened significantly more than core countries and Spain. Even though the ALM activity might continue for the next couple of weeks, we think the credit profile of the Italian curve is now too steep vs. both comparable (Spain) and core (Germany).
One of the drivers for this steepening that is typically referred to is the market expectations for issuance activity. However, looking at the 2024 issuance outlook, we project a net recourse to the institutional market (netting it from the expected retail issuance) for Italy and Spain at EUR70bn and EUR100bn, respectively (in both cases, with a risk that the actual figures end up being lower than this). In that sense, from a pure supply perspective, Italy should not suffer more than Spain in RV terms.
Within the 3Y-10Y area, we selected four bonds in order to be as defensive as possible in case of a bearish market, with the buying leg defined with low-coupon bonds, with a slight mismatch of convexity between the two legs of the box.