EUROPEAN FIXED UPDATE: Bearish bias in play, Gilts lag after hot CPI, USTs await fiscal updates

USTs: -11 ticks, 109-27

• A soft start to the day, down to a 109-29 base and a tick beneath the 109-28+ low from Tuesday. If the move continues, then 109-20 WTD base is next.


• As the above illustrates, while the bias is bearish, action isn’t too pronounced thus far as specific developments have been on the lighter side ahead of an expected floor reading of the US tax/spending bill on Thursday, a 20yr auction this evening in addition to Fed’s Barkin & Bowman.


• That aside, the day’s main event is the meeting of G7 Finance Ministers in Canada. Reports heading into it suggest the focus will be on finding common ground and avoiding an escalation with the US.


• Into the 20yr tap, that section of the curve is trading in-line with its nearby counterparts with yields generally firmer and the curve as a whole is a touch steeper, but as above in recent ranges.


• As a reminder, the curve has been steepening post-Moody's and as progress is made on Trump’s spending/tax bill, as the measures within it will not reduce the US deficit.

Bunds: -50 ticks, 129.74

• Also lower, marginally underperforming USTs at this moment in time though not to quite the same degree as Gilts, see below.


• Updates thus far include the ECB FSR, which highlighted that a shifting geopolitical environment could test EZ financial stability. Additionally, de Guindos has been speaking noting that markets are complacent but this could change and outlined that EZ bond yields have decoupled from the US.


• Amidst those updates a bout of pressure was seen in Bunds, dipping from 130.00 to a 129.78 trough over the course of 15-minutes with modest pressure seen in fixed benchmarks generally but EGBs feeling the brunt of it.


• However, the move appears to have been more technical in nature and spurred by a loss of Tuesday’s 129.99 base, evidenced by the action stalling just ahead of Monday’s 129.72 WTD base.

Gilts: -59 ticks, 90.56

• As mentioned, Gilts are the underperformer this morning with downside in excess of 60 ticks at worst. Driven lower by the above, the morning’s hot inflation series and possibly some concession into supply factoring.


• Inflation for April came in above market consensus above the board with Services at 5.4% Y/Y, eclipsing the BoE’s 5.0% view, and the headline at 3.5% Y/Y, surpassing the BoE’s average forecast for Q2 of 3.4%. Upside was expected given April utility adjustments and the timing of Easter, among other factors; however, the jump was not expected to quite this degree.


• Upside which validates the “skip” decision taken by Chief Economist Pill in May (Mann also voted U/C, though not as a skip); reminder, the decision was 7-2 to cut, and the 25bps magnitude was also subject to dissent.


• In the near-term, this does not change the narrative for the BoE as a hold in June was the base case. However, it has trimmed the odds of an August cut to around a 40% chance vs around 60% pre-release, but much could change between now and then, particularly as many of the inflationary points in the series were one-off or exacerbated by collection dates.


• In reaction to this, Gilts gapped lower by 41 ticks at the open and have since slipped another 21 to a 90.51 trough, notching a fresh WTD low in the process and lifting the 10yr yield to 4.77%, its highest since early April when 4.79% printed.


• Most recently, the DMO 4.00% 2031 sale has been delayed due to an ongoing issue with Bloomberg, the bidding deadline for this has been pushed to 11:30BST.


• Elsewhere, fiscal concern is back in focus for the UK as The Telegraph highlights disagreement over tax policy at the highest levels of government just before the Spring Statement. Outlining that Deputy PM Rayner wrote to Chancellor Reeves pushing for fresh tax measures.

21 May 2025 - 10:05- Fixed IncomeEU Research- Source: Newsquawk