MyStratWeekly – April 25th 2023

Topic of the week: Italy: mind the gap

• The Italian government's monthly cash deficit shows a sharp deterioration in the financing requirement in March;
• This unexpected deterioration in the cash deficit comes after the sharp upward revisions to public deficits between 2020 and 2022;
• The cost of the energy package since last summer and the recent downturn in tax revenues indeed point to fiscal slippage in 2023;
• A new projection of the 2023 deficit should be communicated at the end of April by the government;
• The Italian BTP market seems to ignore this risk, as spreads show remarkable resilience around 185 bps against 10-year Bunds.

Market review: Credit benefits from market lull

• Sideways trading in rate markets;
• Mixed data in the US, stronger growth in China;
• Lower volatility, a boon for credit;
• European stocks outperforming the S&P.

Stéphane Déo's and Axel Botte's podcast

• Should we be worried about the rebound of CDS on US debt?
• Shall we see again a stress on the Italian debt comparable to 2011?

Chart of the week

In the United States, the volatility of short-term rates (2 years) has been above that of 10-year rates for some time. The end of unconventional monetary policy and the abrupt monetary tightening from 2022 has reversed the term structure of interest rate volatility.

With the prospect of a status quo on Fed funds rates now, the volatility of long-term rates has approached the level of 2-year volatility. If this persists, a normalization of the term premium is likely.