Fade the front-end? ASWs eyed
Bunds are rallying following weaker-than-expected US PPI and in the aftermath of yesterday’s CPI miss. Still, one trader played down the gain in the Bund future, “We are at the height of summer trading,” he said.
Likewise, the front-end of the euro curve has also rebounded after the latest US data with reds near unchanged. One dealer reckoned there could be appetite to fade the rally, “From the flows we are seeing there is interest from leveraged accounts to sell when things rally,” he said.
Meanwhile, euro inflation continues to linger near recent highs with European gas futures pricing rising around 5% today. Yesterday the euro inflation swap September fixing traded above 10% at 10.02%. “That’s a big number,” noted one dealer today, with EUR 1y swaps +12bps and above 7% today, and 2y +8bps.
In swap spreads, recent price action was a talking point, “It’s quite interesting that spreads haven’t really widened with Bunds today. There’s a bit of tentative selling interest around,” a trader said.
At the same time, a euro deal has popped up on the screens today with Volvo Treasury issuing €500m 5y, "It's not clear if they have swapped.. corporates haven't been as active as they used to be." Last prices were Bobl at 93bps (-0.1bp), Bund at 93.5bps (-0.2bp) and Buxl at 57.8bps (-0.1bp).
Across the swap curve last prices were 2s/5s at 18.25bps (+0.25bp), 5s/10s at 25bps (-0.5bp) and 10s/30s at -14.5bps (+0.5bp).
Could Italy be a fallen angel? - SocGen
In a strategy note published yesterday, Societe Generale discusses recent credit downgrades to Italy and argues the NGEU fund will be key. Overall, it finds a junk rating later this year is “very unlikely”. The bank writes:
- “Moody’s believes the current environment no longer supports the stable outlook and the resignation of former PM Mario Draghi has significantly altered the sovereign risks in Italy. The Moody’s rating is currently at a historical low and just one step away from sub-investment grade status.
- “NGEU fund is key… a Eurosceptic government in Italy would increase the tensions with the EU and reduce the likelihood of structural reforms that are needed to unlock access to the NGEU fund… Italy relies heavily on Russian gas imports, and further cuts in gas supply from Russia will put Italy’s economy at risk. Improvements in Italy’s debt affordability in recent years are also set to reverse as the ECB normalises its monetary policy.
- “Junk status is very unlikely this year. Italy’s general elections will take place in late-September. Moody’s will downgrade Italy’s rating to Ba1 only if the election results make it believe that Italy’s medium-term growth prospects have significantly deteriorated. This is not our baseline scenario, as Italy’s right-wing parties have become less extreme than before. That said, negative rating actions by S&P or Fitch could happen later this year.
- “In the unlikely event of a rating downgrade to Ba1, the market impact could be large, as many funds would be forced to sell their BTP holdings due to the restrictions in their investment mandates.”