EUROPEAN FIXED INCOME UPDATE: Bunds surge in early trade, dragging global FI higher

USTs: +8.5 ticks; 110.05+

• US paper is attempting to atone for Friday's losses which were brought about by the firmer-than-expected US jobs report, which avoided the soft outcome that some in the market had been positioning for.


• Focus at the start of the week has been on the trade front ahead of an anticipated meeting between US-China officials in London to discuss the trade situation; note, Chinese Foreign Ministry spokesman avoided a question on the matter at a briefing today. If there is to be a readout, focus will be on how committed both sides are to implementing the Geneva agreement and signs of additional progress.


• Elsewhere, whilst the Fed is in its blackout period, US President Trump has teased over a potential imminent decision on who will replace Fed Chair Powell when his term expires next year. As it stands, markets price the next full 25bps cut in October with a total of 46bps of cuts seen by year-end.


• Today's calendar is light with focus on this week's CPI and PPI releases due on Wednesday and Thursday respectively. On the former, MS believes "May is the starting point of a sequence of increasingly strong core inflation prints" and forecasts "the tariff push will peak in 3Q25 and start to fade in 4Q25".


• From a supply perspective, the Treasury is set to issue USD 58bln of 3yrs on Tuesday, USD 39bln of 10yrs on Wednesday and USD 22bln of 30 yrs on Thursday.


• Sep'25 UST contract has been as high as 110.05+ but is some way off Friday's peak @ 110.29+. The US curve is fractionally bull-steepening with the US 10yr yield back below the 4.5% mark @ 4.47%.

Bunds: +60 ticks; 130.97

• Bunds have very much started the week off on the front foot and are leading global fixed income markets higher.


• From a fundamental perspective, fresh macro drivers for the Eurozone are lacking following the hawkish reaction to last week's ECB policy announcement. We have seen further commentary from Bank officials over the weekend with Nagel noting that the central bank has maximum flexibility on rates, whilst Schnabel stated we should not expect a sustained decoupling between the ECB and the Fed.


• However, these comments have hardly shifted the dial for the ECB with markets continuing to price around 25bps of cuts by year-end. Therefore, it may be the case that thin market conditions on account of Whit Monday are exacerbating the price action as German paper attempts to atone for recent losses.


• Sep'25 Bunds have eclipsed Friday's best @ 130.77 with focus on a test of 131.00. If breached, the pre-ECB high sits @ 131.47. From a yield perspective, the 10yr is eyeing a test of 2.5% to the downside.

Gilts: +33 ticks; 92.16

• Sep'25 Gilts are higher, being dragged up by the moves in German paper with fresh UK drivers lacking.


• Over the weekend, BoE's Greene remarked that the disinflation process is ongoing and expects inflation to continue to come down to the target over the medium-term.


• However, greater attention is on Wednesday's UK spending review. The review is a precursor to the Autumn Budget, ahead of which Reeves has once again ruled out a major tax increase for “working people", and more generally that she has “no intention of raising taxes again on the scale of the 2024 budget”. Elsewhere on this week's agenda is UK labour market metrics due out tomorrow.


• Currently, markets do not fully price a 25bps cut until November with a total of 40bps of loosening seen by year-end.


• Sep'25 Gilts have moved back onto a 92 handle but thus far are respecting Friday's peak @ 92.36. The UK 10yr yield is currently sat just above the 4.6% mark.

09 Jun 2025 - 09:50- ForexData- Source: Newsquawk