EUROPEAN FIXED UPDATE: “Beautiful” trade for USTs, Gilts bid but fading, Bunds languish in the red

USTs: +26 ticks, 111-04

• Back above the 111-00 mark after slumping to a 110-01 low on Wednesday. The trough was hit in the choppy trade that occurred in the hour after Trump’s 90-day & China update, during this period USTs moved by over a full point. The low coincided with the FOMC Minutes, however the account was largely ignored.


• Since, USTs have been grinding higher and holding just off a 111-08 peak and back within reach of Wednesday’s 111-20 high. Strength comes as US equity futures find themselves under modest pressure, pulling back a touch from Wednesday’s record moves. However, the upside is mainly a function of Trump’s action alleviating some of the concern around the bond market.


• A bullish-bias that was added to by a strong 10yr tap, after the ropey 3yr outing on Tuesday; the 10yr saw a 3bps stop through and a robust cover, however direct demand collapsed to near 1% but indirect jumped and offset this. As a reminder, 30yr Bonds are due today.


• As Trump has provided a breather on tariffs, ex-China, attention turns to the upcoming CPI print, where the core M/M is seen slightly hotter than the prior while the headline is expected to moderate a touch. While the data has been overshadowed by the most recent tariff updates, it will still provide insight into how pricing was beginning to react to the changing trade landscape.


• Into the release, markets have around 85bps of easing implied for 2025, vs over 115bps in recent sessions. Given the bid this morning, yields are lower across the curve and steeper once again but to a much lesser extent than seen recently.

Bunds: -90 ticks, 129.67

• In contrast to USTs, Bunds have been lower by over 150 ticks this morning. Seemingly trading as you would expect a haven to in the context of European bourses catching up to the c. 10% gains seen stateside on Wednesday.


• Nonetheless, the action is in stark contrast to USTs which, as discussed above, are bid. Furthermore, while European peers such as OATs have a bearish-bias it is much more limited with periphery counterparts (i.e. BTPs) near enough unchanged, divergence is causing marked spread tightening vs the widening seen WTD; BTP-Bund back below 120bps vs 135bps peak on Wednesday and 107bps open on Monday.


• European specifics are a little light with some confusion over whether Trump’s reciprocal cut to 10% applies to the bloc, given the EU has outlined its initial retaliation. While we are yet to hear from the EU in any detail on this, von der Leyen this morning was essentially waiting to speak with member nations, US Commerce Secretary Lutnick expects the EU will delay its planned tariff retaliation.


• Bunds hit a 129.02 base but have since lifted markedly off lows to a 129.84 peak. However, this still leaves them significantly lower on the session and shy of 130.75 and 130.58 from the last two sessions.


• Tariffs aside, Germany is focussed on its domestic political situation as Merz has managed to come to a working coalition with SPD. However, this will leave the combined CDU/CSU & SPD government significantly shy of the ⅔ level required for constitutional reform; not an immediate issue given the measures passed under the old configuration. Pertinently, but several years away, polling for the 2029 election is for the first time showing a lead for far-right AfD.

Gilts: +61 ticks, 91.31

• Gaped higher by just five ticks at the open given the two-way lead from the above before slipping by 10 ticks to a 90.65 trough, following the risk tone and Bunds. However, this was almost immediately retraced as Gilts spiked above 91.00 and continued to climb to a 91.51 peak.


• Strength driven in a similar manner to that seen in USTs as Trump’s move alleviates some of the bond market pressure from lower growth expectations and higher inflation expectations in the longer term, points which weigh heavily on the UK given the slim fiscal headroom under already slashed OBR growth forecasts and a sizeable near GBP 300bln issuance plan.


• While the strength in Gilts is pronounced, the benchmark failed to breach yesterday’s 91.74 peak and has already begun to pullback from best levels despite the continued gains seen in USTs. With Gilts currently on track to end the week with losses of 300 ticks. Action underscores that the UK’s fiscal position remains precarious in the eyes of the market.


• Given the strength in Gilts, the 10yr yield is under pressure and below the 4.7% mark. However, short-end yields are bid with the curve mixed but ultimately flatter. Action has resulted in the odds of a May BoE cut trim to just an 80% chance of a 25bps move vs 30% chance of a 50bps move at points on Wednesday.

10 Apr 2025 - 10:10- ForexEU Research- Source: Newsquawk