On Tuesday, French government bonds, known as Obligations Assimilables du Trésor (OATs), experienced a notable uptick as the market entered a risk-off environment. This movement follows a positive trend that began on Monday, with OATs closing 1 basis point richer. In contrast, German Bunds (IK/RX) ended the day 2 basis points cheaper, while Spanish bonds saw a slight decrease of 1 basis point. This divergence is logical as market participants appear to be reducing their risk exposure ahead of the first round of the French elections this weekend.

Opportunistic Buying and Italian Bonds

In the midst of these shifts, the desk observed opportunistic buying from domestic accounts and Eurozone real money investors in Italian BTPs (Buoni del Tesoro Poliennali). The demand was particularly evident when German Bunds (IK/RX) dropped 3-4 basis points just before nearing the 155 basis point spread in the 10-year Italy/Germany bond comparison. This interest was focused primarily on the 15-year and 30-year segments of the yield curve, highlighting a strategic move by investors to capitalize on these lower prices.

Italian Bond Auction and Market Dynamics

This week marks a significant period for Italian bond supply, with the primary event being the auction of 5-year and 10-year bonds scheduled for Thursday. The Italian Treasury (Tesoro) has announced the issuance of EUR 3.5 billion each in 5-year and 10-year bonds, maturing in July 2029 and July 2034, respectively. Additionally, there will be EUR 1.75 billion issued in CCTeu (Certificati di Credito del Tesoro) maturing in April 2032. The announced sizes are relatively standard, but the key point of interest is that this could potentially be the last issuance of the 7/34 bond as an on-the-run security.

Market Valuation and Potential Moves

In terms of valuation, the 7/34 bond is not perceived as particularly cheap at the moment. The desk anticipates that in the event of a rally in country spreads, there might be some selling pressure on these bonds. This outlook is shaped by the expectation that investors will seek to lock in gains and reallocate their portfolios in response to shifting market conditions.

Q3 Funding Plans and New Issuances

Adding to the week’s developments, there was the announcement of the third quarter funding plan. This includes the introduction of new bonds: a 2-year bond maturing in August 2026, a new 5-year bond maturing in October 2029, and a new 10-year bond maturing in February 2035. The expectation is that the first of these new issuances will be the 10-year bond. This choice of a longer maturity, as opposed to a shorter one, suggests that the market may currently be underweight in the 2035 maturity range. This hypothesis is supported by the strong performance of the 3/35 bond since the beginning of the year.

As we approach the weekend, all eyes are on the first round of the French elections. The outcome could have significant implications for the Eurozone’s second-largest economy, potentially influencing fiscal policies and investor sentiment across Europe. Meanwhile, investors will be closely monitoring the Italian bond auction results and the response to the new issuances announced for the third quarter.

This week’s movements underscore the intricate dynamics of the bond market, where geopolitical events, economic indicators, and strategic investor behavior intersect to shape market outcomes. As always, staying informed and agile in response to these changes is key for navigating the complex landscape of global finance.