[MARKET ANALYSIS] Bunds and OATs firmer as energy movements overwrite domestic developments for now

EGBs dominate the fixed income space this morning. Bunds after the latest state parliamentary elections, and OATs after sovereign updates and the latest fiscal disclosure. However, despite these points, EGBs are firmer with the marked energy pullback providing relief and some caveats/points to look to with reference to Bunds and OATs specifically. As it stands, Bunds are firmer by over 55 ticks, just off a 120.93 peak, while OATs are firmer by nearly 100 ticks, at a 112.36 high. Again, the broader energy move is thus far overshadowing the domestic dynamics, with some of this also likely a rebound from the marked fixed income pressure seen on Friday. For Germany, the Grand Coalition’s CDU had a disaster in the two elections, while their SPD partner fared somewhat better. Within Mecklenburg-Western Pomerania, the CDU are set to come in below the 5% threshold to enter state parliament, while AfD won with 38.2% but PSD a near second on 35.5%; a point that provides some relief, as there is no appetite to work with AfD, and thus SPD will likely lead a SPD-Green-Die Linke combination of some description in the region. Additionally, preliminary results in Berlin were poor for the coalition. With Die Linke taking over 25%, followed by the CDU on around 19%. An outcome that opens the door to a red-red-green coalition of Die Linke, SPD and Green in the region. Again, some of the immediate concern is somewhat offset by the continued, but dwindling, involvement of SPD in any outcome. For now, we await the final results of Mecklenburg-Western Pomerania to confirm if CDU has missed the threshold. Thereafter, we look for signs of more pressure on Chancellor Merz and whether the Grand Coalition may look for an alternative to him, a ‘Kanzlertausch’, given the September regional election outcomes and his personal low approval rating. Turning to OATs, firstly digesting the trend cut to negative from stable at DBRS, due to “the risk of the government failing to address fiscal imbalances is increasing, leading to a continued rise in the government debt ratio over the medium term”. Additionally, Scope cut France to A+ (prev. AA-), primarily due to the deteriorating fiscal outlook. Updates that come amid the nation revising its deficit expectation for 2026, to 5.4% of GDP vs 5.1% in 2025 and the goal of 4.6%. Accompanying this, PM Lecornu announced ambitions to limit the deficit by 2027; however, this still leaves the nation far from the EU EDP level of 3%, and thus exposes it to penalties and/or rating revisions. Note, we get an update from Italy on Tuesday for its 2025 deficit level, which was estimated at 3.1%. Finance Minister Giorgetti has expressed hope that this will be downgraded to/below the 3% level on Tuesday; a dynamic that could spark a marked move in BTP-Bund and BTP-OAT 10yr yield spreads. Thereafter, and either way, we look to see if Giorgetti moves forward with using the Escape Clause or not.