Rates Spark: Tentative relief

The start of the week has brought some tentative relief to the ECB. The prospect of Kevin Warsh as future Fed Chair has taken some steam out of the adverse FX dynamics. The positive surprise of the ISM manufacturing PMI also helped by facilitating a slight hawkish repricing, i.e., bear flattening of the US curve.

Risk sentiment is also bolstered by a tentative de-escalation of Middle East tensions over the weekend which led to a further slide of energy prices from their highs at the start of the week.

We think the ECB could be a little more relaxed going into this Thursday’s policy meeting, if the calm lasts. Generally speaking, the ‘good place’ is looking a little less comfortable, though, as the volatility over the past weeks has shown. A more dovish-leaning and cautious ECB could already prepare for eventualities in March. This is something that the press conference could reveal on Thursday.

On Monday, Italy mandated banks to launch a new 15y benchmark. While markets had been eyeing the possibility of a long-end bond in line with patterns seen in previous years, the sentiment for spreads has been very constructive since the start of the year. 10y spreads for Italian government bonds over their German peers have tightened by around 10bp over the past month, and the announcement of the mandate on Monday did not leave any lasting mark on the lone spreads levels.

Sentiment is also supported by S&P having upgraded the outlook for Italy’s BBB+ rating to positive at the end of last week. In direct comparison to France, especially, where the 10y yields are trading at a similar level, this could tilt the market in favour of Italy again. France, after all, still faces political gridlock and uncertainty heading into the presidential election of early 2027.