This morning, the European sovereign market has opened softer due to Christine Lagarde's hawkish comments that see 2021 as the economic recovery year. The central bank is already envisioning a post-pandemic phase in which monetary and fiscal support will need to be waned down gradually. However, the market is still relying on additional monetary support as restrictions weigh on the bloc’s economic outlook amid a slow start to the vaccination campaign. On Thursday, the European Commission publishes its Economic forecasts. In case they are revised down, we anticipate spread compression among European sovereigns to resume. Indeed, monetary policies will remain the only tool to stimulate the economy as additional fiscal stimulus is unlikely amid the German elections.
While European sovereigns selloff, Italian BTPs remain resilient at Mario Draghi's prospect to form a new government. According to national news, Draghi has broad support among several parties including Matteo Salvini's Northern League, the right-wing party that now leads national polls. Today and tomorrow Draghi will start the second round of talks with parties, and if they go well he might announce his cabinet picks before facing a confidence vote in both houses of parliament. Last week, the 10-year spread between the BTP and the Bund fell below 100bps for the first time in nearly six years. Yet, we believe that 30-year BTPs are set for more significant upside as the 30 years BTP-Bund spread has the potential below 120bps.
In the United Kingdom, Bank of England’s governor Bailey’s speeches today and Wednesday will be on the spotlight ahead of the Gross Domestic Product released on Friday. Gilts continue to sell off days after the BOE's held its monetary policy meeting. This morning 10-year yields have broken above their upper trendline at 0.5%, making 0.65% their new resistance level. Although Gilt yields remain at the lowest level in history, it will be essential to understand whether the BOE is comfortable with their quick rise. If yields continue to rise, they may hamper the spending binge that the governor Baileys anticipates in the second half of the year.