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Nulla Nuova, Buona Nova

21 August 2018 by jbchevrel

10y BTPs tightened another 8bp vs Bunds today, bringing the 1-week move to c25bp, while no fundamental good news regarding Italy has come on the wires. 5y sovereign CDS has tightened broadly in line (-9bp), taking the Italian financial complex tighter (MB/G/UCG/ISP -5/-4bp). Short-term technical factors including supply and carry have likely helped BTPs here. Indeed, we have c€7B of German supply across today (2y Schatz) and tomorrow (10y Bund) while supply in Italy will only start next week. Yesterday Moody’s announced that it will postpone its review from Sep 7 to ‘end-Oct at the latest’. Adding to that, the Italian Cabinet Secretary Giorgetti said he won’t rule out breaking the 3% budget deficit limit in 2019. Those aren’t good news but failed to hurt the rally. Next week, BTP supply is back (5s and 10s on Thu. Aug 30) to test appetite for Italian risk, and we may well see a correction wider. That would be consistent with the last 10 years’ seasonal pattern. Indeed, the BTP spread has tightened -2bp on average in AUG to widen back +6bp on average in SEP.