EUROPEAN FIXED INCOME UPDATE: Paper higher as Trump actions spark risk-aversion/global growth concerns

USTs: +3.5 ticks; 108.30+

• The main macro focus for the US has been on President Trump's announcement of 25% tariffs on Mexico and Canada (with the exception of 10% on Canadian energy products) and 10% additional tariffs on top of existing levies for China. Price action for USTs has seen prices higher (albeit off best levels) as the global risk-aversion/lower growth impulse just about outmuscles the prospects of a tighter policy approach from the US. On which, the next 25bps cut by the Fed is still fully priced for the July meeting, whilst 42bps of cuts is seen by year-end vs. 46bps Friday. Traders will need to frame this weekend's actions in the context of whether or not it suggests this will be a more durable feature of the US economy or a temporary state of affairs during negotiations.


• Over the weekend, WSJ reported that Wall Street is concerned about Treasury Secretary Scott Bessent’s approach to government borrowing. Investors credit a 2023 strategy of relying on short-term Treasurys with stabilising markets, but Bessent has criticised this method amid fears of increased borrowing under Trump’s administration.


• Today's ISM manufacturing release is likely to take a back seat to trade tensions with the most notable data point this week from the US coming via Friday's NFP report. Treasury Financing Estimates ahead of the quarterly refunding announcement on Wednesday.


• Upside targets for the Mar'25 UST contract sees the 31st January high @ 109.09+, downside focus is on the 27th January low @ 108.16. The US curve is currently in bear-flattening mode with the 2s10spread narrowing by 6.9bps. The 10yr yield had been as low as 4.496% but has since stabilised around the 4.55% mark.

Bunds: +56 ticks; 133.08

• Bunds gapped notably higher at the open with traders wary of the negative growth impulse from the ratcheting up of trade tensions over the weekend. For the EU specifically, US President Trump that tariffs will definitely happen with the EU. EU said it rejects US President Trump's decision to hit Canada, Mexico and China with tariffs and it would respond firmly if the US imposed tariffs on Europe, according to FT. ECB's Villeroy noted that Trump's tariffs will increase economic uncertainty and there will likely be further rate cuts". ECB's Simkus said there is space left before the neutral rate is reached and expects a 25bps decrease in march and a "couple more" decreases in later months. 84bps of ECB cuts are seen by year-end vs. circa 73bps on Friday.


• Eurozone inflation data saw headline Y/Y HICP print at 2.5% vs. Exp. 2.4%, super-core 2.7% vs. Exp. 2.6% and services inflation tick lower to 3.9% from 4.0%. There was little follow-through into European paper.


• Mar'25 Bund has been as high as 133.26, stopping shy of the YTD peak @ 133.48. German 10 year yield is just about holding above the 2.4% mark. If this gives way, there is clean air in terms of recent lows until the 3rd Jan trough @ 2.352%.

Gilts: +53 ticks; 93.31

• US President Trump stated that the UK is also out of line but then suggested he is getting on well with PM Starmer. GBP is seeing shallower losses than some peers on account of its relatively smaller trade deficit. From a broader macro perspective, this week is BoE week with the MPC set to pull the trigger on a 25bps rate cut via an 8-1 vote split with lone dissent expected from external MPC member Mann. Focus will be on any clues over future easing plans and whether the MPC retains language over a “gradual approach” to lowering rates and whether policy will remain “restrictive for sufficiently long”.


• Mar'25 Gilt has hit a fresh YTD peak @ 92.94. UK 10yr yield is just about holding above the 4.5% mark. If this gives way, the next target comes via the 17th December low @ 4.473%.

03 Feb 2025 - 10:20- Fixed IncomeData- Source: Newsquawk