Long Bund 02/34 vs. Short OLO 1O/34

Belgian government bonds (OLOs) have been out performing EGB core & soft-core recently, despite no significant improvement in their fundamentals. This performance may have been overlooked, as strong buying following the recent cancellation of the auction allowed OLO to tightened through 59 bp in 10Y vs Bund. The upcoming Fitch review on Friday and uncertainties surrounding the Belgian federal election in June pose potential risks, which could impact the credit risk premium for OLOs. W e think that risk/reward staying long Belgium vs. Germany in that context seems too high ahead of rating & political risks. Therefore, we recommend entering in a Short OLO 10/34 vs. Bund 02/34 (entry: 59 bp; target: 70 bp; stop-loss: 55 bp; horizon: 5m).