EUROPEAN FIXED INCOME UPDATE: Early-European EGB drop amid renewed hawkish ECB repricing with NFP ahead

Analysis details (10:55)

Core EGB benchmarks suffered another bout of pressure on the arrival of European participants and the resumption of Gilt trade. Action which saw the German 5yr yield surpass the 0.00% mark for the first time since May 2018, printing a session high of 0.03%, alongside this, the 10yr yield tested 0.20% but failed to breach the mark, resistance that seemingly capped the downside in debt benchmarks. The move occured in the context of hawkish pricing across the European fixed space after yesterday’s BoE rate hike and hawkish dissenters was followed by an ECB statement that removed the reference to ‘either direction’ regarding the adjusting of instruments and a hawkish Lagarde who did not push back on 2022 hike expectations. This morning, market pricing has ~50bp of upside implied by end-2022; a view echoed by Goldman Sachs who expect 25bp hikes to occur in September and December 2022 following the March announcement that APP will conclude in June. Reminder, under the current schedule APP is due to be tapered down to EUR 20bln a month from October and then run for as long as is necessary. Given the morning’s action, benchmarks have dropped below recent support marks with Bunds now looking to 166.00 and Gilts 120.50; similarly, yield watch has us looking for a more convincing breach of 0.20% and 1.40% respectively. Turning to the periphery, where benchmarks are also subdued and the BTP-Bund yield spread continues to widen and has once again surpassed the 150bp mark, to fresh YTD highs. Central Banks aside, focus for the periphery remains on supply and following Italy’s 10yr I/L syndication announcement desks anticipation new 30yr outings from both Belgium and Spain to occur next week; note, we also have US 3-,10- & 30-yr supply due. Finally, the session ahead is dominated by the US labour market report and while expectations are for a NFP print of 150k, the range goes as low as -400k in wake of the disappointing ADP print.

04 Feb 2022 - 10:55- Fixed IncomeResearch Sheet- Source: Newsquawk