10-year BTP rates return to exceeding the psychological threshold of 4%, bringing the BTP-Bund spread above 156 basis points.
Also on the rise the yields of other euro area government bonds, a handful of days before the first round of the elections in France, scheduled for June 30th, and waiting for some key data on inflation which will arrive tomorrow, Friday June 28th:
traders wait the publication of both the consumer price indices of France, Italy and Spain which, in the United States, of the Fed’s preferred parameter, ergo the core PCE index, to monitor the price trend and consequently establish the direction of US fed funds rates.
It is therefore not ‘just’ fear for the outcome of the elections in France that puts pressure on euro area government bonds.
BTPs and Eurozone government bonds they also pay, and again, the inflation factor.
As for the trend of Italian paper specifically, the question that continues to haunt investors concerns the way in which the tension on French bonds is infecting and may continue to infect BTPs.
Inflation becomes scary again. Bonds depressed by “higher for longer” rates
The fear of one new acceleration of inflation around the world and the concern about the outcome of the elections in France These are the two main factors that are making investors in the euro area’s sovereign debts pay attention.
As regards inflation, fears of a new flare-up have rekindled after the release of some macro data, including those of Australia and Canada, which confirmed the persistence of price growth.
While waiting for the key data in the Eurozone and the United States relating to inflation, scheduled for tomorrow, investors have thus returned to moving away from the fixed income market, pricing in the already high probability that the euro area and US rates, decided by Christine Lagarde’s ECB and Jerome Powell’s Fed respectively, will remain high for a long time to come.
The “higher for longer” perspective, i.e. “higher rates for a longer period of time” in short, it has returned to distress doves and markets.
Also highlighted the great doubt that some central banks made a mistake in cutting interest rates.
The question has come back to haunt us, for example traders looking to Canadaafter the publication yesterday of the consumer price index, which rose in May on an annual basis at a rate of 2.9%, more than 2.7% in April.
The acceleration of inflation became evident precisely after, at the beginning of the month, The central bank of Canada had cut its main reference rates by 1/4 percentage point, lowering them from 5% to 4.75%.
An error?
Also watch out for Australia, where the data relating to the price trend could convince the RBA at this point (Reserve Bank of Australia), to raise, rather than cut, rates.
All these questions, combined with the France factor, have caused us to take another step backwards to government bonds in the last few hours.
On the other hand, from the last meeting of the FOMC, the monetary policy arm of the Fed, it emerged that the expectations of US central bank officials for this year they are just one rate cut.
If so, even Christine Lagarde’s ECB would be forced to be more than cautious: a prospect that government bonds don’t like at all.
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Sell on BTPs, French and German bonds. Disposals on Australia and Japan
Today, BTPs, French OATs and other euro area government bonds are therefore back in the sights of sales. The consequence is an increase in the respective yields.
And so, precisely, 10-year BTP rates rose by approximately 4 basis points, returning to exceed the 4% threshold, as emerges from the Bloomberg table.
The yields on French bonds are also up, at 3.26%, just as the rates on euro area bonds which are considered safer are also advancing, i.e. the Bunds of Germany: in this case the increase brought the ten-year rates to settle at 2.460%.
Greek ten-year rates continue to remain well below those of Italy, also rising, but at 3.699%, well below the 4% threshold breached again today by BTP rates.
It’s worth highlighting the little-moved performance of Treasury rates, that is, those government bonds that are directly affected by the publication, tomorrow, of the core PCE index, which guides the decisions of Jerome Powell’s Fed. Ten-year rates, in fact, are practically stuck at around 4.39%.
Boom instead for the yields of Australian government bonds. Furthermore, the rise in Japanese sovereign bond rates is no joke either.
Moving on to 10-year BTP-Bund spread, today’s bullish trend, equal to +2.8 bps, takes it above the threshold of 156.5 basis points.
The widening of the differential is explained by the growth of BTP rates, which is proving to be faster than that of German yields, and which in particular after the outcome of the European elections, it is significantly eroding the advantage that BTPs had come to have even over German debt.
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He plays against Italy the France effect with Paris which, given the surge in debt and deficit in recent years, is now compared more to Rome than to Berlin.
The question of the upcoming elections in France (in two rounds: the first on Sunday 30 June and the second on Sunday 7 July) was also addressed, albeit not explicitly, by the governor of Bank of Italy Fabio Panetta who, yesterday, strongly urged the ECB to be ready for the effects of possible political shocks.
The French effect on Italy was clearly evident, with BTP rates moving in tandem with French OAT rates for several sessions.
It was like this that swelled also the BTP-Bund spread, which followed the upward trend of the OAT-Bund spread, or the France-Germany spread.
But how much is France really infecting Italy? Are BTPs destined to depend on the fate of OATs?
Regarding the consequences on BTPs, the rate increases and disinvestments that have affected French paper are not of concern Mauro Valle, head of fixed income at Generali Asset Management (part of Generali Investments) which, in the note “French electoral turmoil and the ECB’s hawkish stance: why the prospects for European bonds remain positive”, he revealed that he is not particularly worried about the risk that BTPs have become hostage to the French problems. The reason? The France risk could have, in his opinion, an idiosyncratic nature.
Valle recalled what happened in the last few sessions, namely that “the market movements in the last few days have been dominated byunexpected dissolution of the French Parliament by Macron and the lightning call to the elections”, a “decision” which triggered a strong risk-off sentiment especially for French assets, with the OAT-Bund spread which touched 80 basis points”.
Pending the outcome of the French elections, the expert admitted that “it is difficult to say where spreads will move in the coming weeks of the election campaign”, adding that “there is a risk that they will continue to expand”.
Having said that, continued the head of the fixed income division of Generali Asset Management, “after the electoral results and the definition of the political majority, the markets could stabilize.”
Of course, “fears about the far-right party’s fiscal policies are high, given that the deficit (of France) stands at around 5% and the debt/GDP ratio exceeds 110%. But we also note that the French 2-year spread is not underperforming the 10-year spread (a key signal of limited idiosyncratic risk for now) and that 10-year yields are quite stable (while spreads have widened due to the rally of the Bund). The risk-off sentiment has caused Bund rates to fall, which for now should move between 2.2% and 2.5%”.
On the Italian paper, Valle highlighted the rise of the “10-year Italian BTP-German Bund spread”, which “widened to 157 bps after the French news (and the 2-year spread reached 77 bps) and then retraced slightly” (and rose again today), noting however that “the widening of the Italian spread is mainly due to the Bund rally”, that is, the risk off that led traders to take refuge in assets considered safer.
There has also been talk of the effect of the French elections in the last few hours Gregor Hirt, Global CIO Multi Asset at Allianz Global Investors.
Hirt, in commenting on the trend of the bond markets, also mentioned the BTP-Bund spread, in particular its widening to a value “around 150 basis points, as a consequence of the widening of the OAT-Bund spread”.
With respect to Generali Investments, the CIO however stated that precisely the correlation between the trend of the two spreads “does not yet justify, in our opinion, a strong overweight” on BTPs.
Rather, the Allianz expert stated rather that “a potentially attractive level for building long-term positions could be represented by a BTP-Bund spread of 200 basis points“, adding that he still recommends a long exposure to US Treasuries for multi-asset portfolios.
Hirt also recalled Goldman Sachs’ scary outlook, who believes that, if Marine Le Pen’s RN party were to win, the ratio between public debt and French GDP could jump up to 120%.
The markets have already spoken in this regard, continued the CIO of the Allianz division, “sounding the alarm, in looking at the possibility that the far-right RN party led by Marine Le Pen forms a government”.
There is no shortage of examples: “In the days following (Macron’s) announcement of the elections, the euro fell for two consecutive sessions against the dollars and the Cac 40 (Paris stock exchange) lost more than 6%. The 10-year France-Germany spread thus jumped to its record high since February 2017.” concluded the IOC, not excluding the risk that, in this context, the differential continues to rise, thus putting the other bonds in the euro area at risk in general.
Meanwhile, some are already talking about French 10-year rates that could jump up to the levels of BTP yields.
