[MARKET ANALYSIS] OAT-Bund 10yr yield spread hits another multi-year wide, Moody's looms

A mixed start for benchmarks, as the complex takes a bit of a breather from the recent rally in core counterparts as growth concerns dominated the narrative for debt that is not dominated by domestic political and fiscal concerns. USTs are lower by a few ticks, in a pullback from the 106-16 high which printed on Thursday, rather than in reaction to a fundamental development, though energy continues to tick higher and the risk tone is gradually improving, Currently, holds at the base of a 106-05 to 106-14 band. Bunds essentially flat, just off lows in a 122.13-54 band. Upside was seen through the morning’s first Flash PMI from France, with Bunds peaking on the German series but then waning and proving relatively unreactive to the EZ-wide figure. For Europe, the series points to growth of 0.3% in the period, a touch slower than September’s implied pace, but still robust enough to keep the ECB on track to tighten, and perhaps more so than currently assumed by desks, particularly as inflationary pressures mount; a dynamic that may explain the pullback in Bunds following the German data and into the EZ print. OATs are, of course, the focus for today. This morning’s Flash PMIs were dire. All three main components fell into contractionary territory. A finding that does not bode well, as recent civil unrest and spread widening will not have been fully accounted for by the respondents. Further, we still await Moody’s verdict on the sovereign tonight, with a downgrade a real possibility given recent events and price action, and then further protest action on the weekend. As it stands, OATs are firmer by around 30 ticks, in a bit of a rebound from the c. 50 ticks of pressure seen on Thursday, but still set to end the week with downside of over 120 ticks as things stand. Given this, the OAT-Bund 10yr yield spread has narrowed by a handful of bps on the session overall, but it did commence it at a fresh high of 176bps; at wides since 2011, when 191bps printed. Gilts are flat and marginally lag European peers within 85.01-36 parameters in a modest reversal of the prior day's action. Overnight focus showed Chancellor Healey continues to underscore a pro-business approach, and was absent of anything which changes the majority view of the budget passing without trouble. The morning's retail sales data contracted at a greater pace than expected, October Flash PMIs were particularly strong, and chime with expectations for a November BoE hike.