EUROPEAN FIXED UPDATE: Bearish trade ex-JGBs which are marginally firmer following supply

JGBs: +11 ticks, 135.79

• Picked up overnight following a strong 30yr JGB auction. Supply was in more focus than usual given the move seen in JGBs and particularly the long-end driven steepening that occurred after the weekend’s LDP election.


• JGBs posted gains of 24 ticks at most following the tap. However, just over half of this has since pared.


• Auction aside, potentially the most pertinent update has been BoJ Governor Ueda cancelling his speech on October 8th. As it stands, that was Ueda’s last scheduled appearance before the end-October BoJ; though, several other officials are scheduled before then.


• Remarks that were keenly sought as the market looks for guidance on whether the BoJ will tighten policy in October or not. As a reminder, LDP leader and likely PM Takaichi is in favour of easier monetary conditions and while she hasn’t spoken on the timing of continued normalisation following her victory, advisor Etsuro Honda spoke with Bloomberg on Monday. During that interview, he said an October hike is “probably difficult”, but doesn't “see a problem” with a 25bps move in December.


• More recently, Takaichi met with the Komeito leader. A meeting of particular pertinence amid concern that Komeito could lead the alliance. However, the meeting was positive overall with agreements shared on two out of three points and talks set to continue on the third; the officials reportedly shared an understanding on history and foreigners.

OATs: -27 ticks, 120.83

• Yesterday, French President Macron gave Lecornu 48hrs to lead discussions with other parties and find a platform for stability and action. Early doors, Politico wrote that Macron reportedly believes the Socialist Party (PS) and Les Republicans (LR) will return to the negotiating table.


• We are yet to hear directly from either side. However, National Rally’s (RN) Bardella said he intends to speak with LR. Remarks made as Bardella suggested both fresh legislative elections and advanced presidential elections are now options.


• Thus far, the OAT-Bund 10yr yield spread is contained within yesterday’s parameters, been as high as 86.7bps but shy of the 88.2bps YTD peak that printed on Monday. As a reminder, the 2024 high resides at 90bps.


• We now await updates on several fronts. How Lecornu’s talks are going, particularly with reference to PS and LR. Whether Bardella has managed to court the support or LR. Insight into whether Macron will attempt to appoint another PM (difficult now the centrist bloc has fractured even further) or call legislative elections. Finally, any suggestion that Macron is moving towards early presidential elections; as a reminder, this scenario is very much the outlier, as things stand.


• Thereafter, the fiscal situation will come under greater scrutiny as the European Commission shortly expects an update under the Excessive Deficit Procedure, while the sovereign rating docket returns to France in the next few weeks.

USTs: -2 ticks, 112-11

• Flat. Specifics for the most part are light owing to the ongoing shutdown and the subsequent lack of US data. Several Fed speakers due, but in the absence of fresh data points it remains to be seen what they can add beyond recent remarks to the narrative.


• On the shutdown, there are some glimmers of progress. President Trump commented that he is willing to look at and make a deal on ACA subsidies, but the government must reopen first. From the Democrats, Senate Minority Leader Schumer said Trump is not yet negotiating with them, but progress on the shutdown is being made.


• Currently, USTs find themselves in a thin 112-11 to 112-15+ band, matching yesterday’s trough and shy of Monday’s 112-19+ best.

Bunds: -22 ticks, 128.34

• Softer than USTs but foreign better than OATs thus far.


• For Germany, the main update was another soft industrial orders print for August, a series that is even worse if large orders are excluded.


• While of note, the series didn’t appear to have much impact on Bunds at the time with the benchmark actually slipping around the release. Since, Bunds have dropped further to a 128.33 low, with downside of just over 20 ticks at most.


• If the move continues, Monday’s trough is at 128.31 before 128.24 from last week.


• Bobl supply of note today. Recent Bobl taps have been weak, and those with b/c lower than around 1.5x have sparked pressure in the benchmark. For reference, the last outing drew a 1.7x cover and while Bunds moved lower, the correlation to the auction is caveated a touch by mixed ZEW and a weak UK tap occurring just before the German deadline.


• Thereafter, ECB’s Nagel and Lagarde are both scheduled though we only expect a text release from the President. .

Gilts: -25 ticks, 90.40

• Also in the red, trading a little softer than Bunds at points throughout the morning, but only marginally.


• The latest tender auction was strong, though did not spur any followthrough to the benchmark.


• For the UK, focus remains on the budget as commentators/desks continue to share their thoughts on what measures Chancellor Reeves may need to take to shore up the UK’s dire finances. Attention on an Oxford Economics note that the OBR’s price forecasts are likely to be revised higher, increasing the taxable value of profit and thus providing Reeves with a GBP 5bln boost.


• However, coverage of this note hasn’t provided Gilts with any respite. The benchmark is down to a 90.40 trough and notching an incremental new low for the week. If the move continues, 90.26 from September 26th is the next point of support.

07 Oct 2025 - 10:15- ForexEU Research- Source: Newsquawk