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‘Hamiltonian Moment’

20 July 2020 by jbchevrel

After slow progress this weekend, the European Council meeting was holding in its 4th day today. The iTraxx indices had a strong open, in the expectation of a deal on the package volume. Overnight negotiations had concluded at 6am this morning after Council President Michel floated the €390B figure in grants for the worst-impacted countries. The indices kept tightening throughout the day. Today’s tightening was coupled with notable compression in XOver/Main (in the area of -8bp for a 4:1 ratio), and minor bullish decompression in SUB/SNR (in the area of +2bp in a 2:1 ratio). Italian risk outperformed on the recovery fund agreement, especially notable in financial space. That echoed the tightening of government bond spreads. Italian 10-year bond yields fell below 1.1%. The spread between 10-year BTP and Bund yields narrowed to the tightest since late March. We mark peripheral banks’ SUB 5y CDS tighter by between -6bp and -8bp today. Low supply is also a supportive factor in the short term, expected to pick up towards the end of August.