EUROPEAN FIXED UPDATE: Already a blockbuster session for fixed, now await the US 10yr tap

USTs: +16 ticks, 110-31

• Already a blockbuster session for fixed income. Overnight action saw USTs slump to a 110-01 trough with downside of over a full point at worst. The pullback in USTs began after a weak 3yr note auction, the results showed a slump in direct bidders, a soft cover and an elevated tail.


• Also driving the move was the ramping up of trade tensions, as Trump made clear that the reciprocal tariffs would (and since have) be coming into effect. In reaction to this, the yield curve is significantly steepening as the near-term struggles to lift as much (though pressure from the 3yr auction has offset) given the increasing likelihood of near-term cuts while the long end jumps on the inflationary implications.


• Another point factoring is that USTs may not be regarded as the preferred haven in the current bout of market turmoil, given that the moves are US-driven. It is worth highlighting/caveating that the moves could see a reversal if recessionary concerns ramp up any further.


• Given all this, the next litmus test for the market in the absence of a tariff/trade driver will be tonight’s 10yr Note auction; an auction which intersects Fed’s Barkin (2027 Voter) and the Minutes from March’s meeting.


• In brief, USTs hit a 110-01 low overnight at which point the 10yr yield climbed above 4.50% by a bps to its highs since mid-February. Thereafter, the benchmark picked-up from lows despite a marked sell off in Bunds (though this was largely catchup action) and a relative improvement in the risk tone; upside, despite those factors, underscores just how pronounced the session’s moves have been.

Bunds: +43 ticks, 130.37

• Initially posted gains of around 30 ticks, in sharp contrast to USTs and feeds into the argument that the US benchmark’s haven status has been tarnished somewhat, as discussed above.


• Thereafter, a bout of significant pressure was seen around 07:00BST. The move began just before the hour and coincided with a sharp pick up in the performance of APAC equities and accompanying moves, to a lesser degree, in European & US futures. Specifically, over the course of ~10 minutes Bunds fell from 130.30 to the 129.13 trough.


• At the same time, the 10yr yield spiked from just above 2.61% to a 2.675% peak, just below Tuesday’s 2.68% best. For the ECB, this leaves around 80bps of easing implied by end-2025.


• After the above move, Bunds have been gradually making their way back to the overnight 130.43 peak, getting back into the green and as high as 130.34 despite the relative recovery in the risk tone. A move that was exacerbated by a Reuters source piece that the ECB is looking to revise its first-year tariff growth hit from the initially thought 50bps, one source believes it could be >100bps; as such, we may see a dovish revision to ECB pricing.


• In USTs, we discussed the marked steepening of the US curve led by the long-end. In Europe, the curve is steeper however, the short-end is leading as ECB easing bets increase. Amidst this, spreads between the core and periphery are at YTD wides of 135bps in BTP-Bund; not yet at TPI levels but increasingly something to watch.


• ECB’s Knot has been on the wires extensively this morning but not changing the narrative, Cipollone scheduled though not due to provide a text. Instead, focus remains on events stateside with particular apprehension into the 10yr tap as a further litmus test for market function.

Gilts: -64 ticks, 91.47

• Gapped lower by around 40 ticks before extending to post downside of 104 ticks, notching a 91.08 WTD base.


• Newsflow for the UK has been very light as we await an update from the PM/Cabinet, with Chancellor Reeves set to hold crisis talks with business leaders and Starmer scheduled to speak with the press at around 11:00BST.


• On that, the Culture Minister said the UK will not be making alterations to the Online Safety Act as part of any UK-US talks, something the US has been pushing for. As a reminder, we are still awaiting details on the UK-US Economic Deal which was reported as essentially done just prior to “Liberation Day”.


• 10 yr yield as high as 4.69% this morning, well off the YTD 4.925% peak but elevated nonetheless. Despite the upside in the 10yr yield, as the UK curve steepens (as discussed in Bunds and USTs) the implied magnitude of BoE easing this year has ramped up to 85bps by end-2025. At extremes before the Gilt open, the odds of a 50bps cut in May stood at around 30% (currently 12%).


• Most recently, the DMO tapped GBP 4.5bln of its 2030 Gilt, results featured an elevated tail but the cover was still near-enough 3x even given a slightly lower accompanying yield, in totality the tap was relatively robust and sparke upside of around 10/15 ticks bringing the benchmark back towards its 91.74 peak, however it remains well into the red.

09 Apr 2025 - 10:15- Fixed IncomeEU Research- Source: Newsquawk