This intensification of tariff protectionism has rekindled concerns about growth and inflation in the United States, causing the US dollar to weaken and US stock market indices to fall, with a knock-on effect on European markets. In Germany, discussions on constitutional reform are progressing. An agreement has been reached between the CDU/CSU and the SPD to create a special €500bn fund for the modernisation of the country’s infrastructure and to reform the debt brake before the new parliament convenes, normally on 25 March.
However, this reform requires a two-thirds majority, implying support from the Greens or the FDP. The latter have expressed reservations about the conditions set by the future coalition government, but have not completely closed the door on negotiations.
Rates: extension of bear steepening trend for € yield curves during Tuesday's session, driven by hopes of a defence deal in Germany, with the Greens party co-leader expressing optimism that a deal could be reached this week, leading to a significant increase in bond supply. As a result, the yield for the 10Y Bund rose by 6bp to 2.90%. By contrast, the yield for the 2Y Schatz eased by 2bp to 2.20%, this decline being partly attributable to investors adjusting their ECB rate cut expectations (4bp rise over the session, with 51b now priced in for 2025, in line with our scenario). The steepening was more pronounced for the 2Y-10Y segment, notably in the case of the € swap curve, with a 7bp steepening to 46bp. Sovereign spreads tightened over the session, with the 10Y OAT-Bund spread trading at 69bp and the 10Y BTP-Bund spread at 112bp. In the United States, Treasuries experienced a selloff driven mainly by Trump's announcements, with the 10Y TNote closing at 4.28%, up 7bp.
Credit: the widening of spreads accelerated on Tuesday after the US-Canada tariff tit-for-tat, with consumer goods underperforming in the case of IG cash. Turning to High Yield, Schaeffler's downgrade from Baa3 to Ba1 (Stable outlook) led to a 20bp widening of its 5Y CDS and an around 12bp widening of its spreads against swap, with the entire sector affected by the tariff ramp-up (+10bp for the ZF and Valeo spreads, +5bp for the Forvia spreads in the cash and derivatives markets). VW, on the other hand, outperformed the iTraxx Main yesterday (the carmaker’s 5Y CDS tightening by 2.5bp when the benchmark widened by 1.3bp) following better-than-expected results overall (see Industry News - Transportation & Mobility below). Lastly, Citycon's spreads widened by 10bp-20bp in the case of its seniors and by as much as 60bp in the case of the c2029 hybrid after S&P downgraded the issuer's rating from BBB- to BB+ (Stable outlook), one day after Moody's announced that the real estate investment company had decided to terminate its credit rating agreement (previously Ba1 CW negative).
Equities: third straight decline by European equity indices, victim of the latest tariff announcements by Donald Trump. Indices fell by 1.4% on average over the session, with the SMI underperforming. At sector level, only energy and utilities finished in the green, while chemicals, travel/leisure and retail underperformed (-3%). The same dynamic was in evidence in the United States, with the SPX down at the European close and the NDX holding up a little better. The V2X ended at 24, at its highest since August 2024.
