EUROPEAN FIXED UPDATE: Benchmarks bid post FOMC & as the tone deteriorates, Gilts lead on data & reports around the Spring Statement

USTs: +6 ticks, 111-06

• A firmer start to the session as the benchmark continues the dovish move seen after the Fed with particular focus on the slowing of the balance sheet run-off (full recap available on the headline feed).


• Action overnight was contained on account of no Japanese trade, but once cash trade resumed the benchmark continued its climb and is currently at a 111-06+ session high with yields lower across the curve which itself is flattening. Upside which occurs despite the robust US equity risk tone, but potentially being added to by the deteriorating European tone in-fitting with the most recent moves in EGBs.


• Post-FOMC, attention now returns back to the economy (PCE due next week) and also tariffs as the clock ticks down to the April 2nd implementation of reciprocal tariffs.

Bunds: +22 ticks, 128.33

• Firmer, picked up most recently as the risk tone deteriorated in the European morning with specifics somewhat light but a lot of focus on global economic uncertainty into the April 2nd tariff date and digestion of the EU’s defence white paper.


• On this, WSJ’s Norman points out there are “reasons to be sceptical EU member states will spend EUR 650bln in additional defence spending” given new 1.5% of GDP flexibility in budget rules. Flexibility which implies that it will take time to reach such a spending level; a view which is potentially weighing on the risk tone.


• For bonds specifically, the Greek PM’s comments are of note as Mitsotakis highlights that at some point they will need to discuss moving to grants instead of loans to fund the expenditure. A view which is potentially bearish, as the funding (likely via issuance) would not be paid back.


• To recap, the initial bias was firmly bullish given the FOMC readacross which lifted Bunds to a 128.62 peak. However, this faded in the European morning as the US risk tone was strong and the European one relatively steady, sending Bunds to a 128.22 base. Most recently, as the European risk tone has sharply deteriorated, Bunds have lifted back to the upper-end of session parameters but are still some 20 ticks from best.


• No real reaction to supply from Spain and France this morning or a handful of ECB speakers, including Lagarde.

Gilts: +43 ticks, 92.74

• Outperforming on the back of reports that the Chancellor will announce the biggest spending cuts since austerity next week with cuts to Whitehall budgets by billions of pounds more than thought (the general view was already for significant cuts in the Spending Review).


• Additionally, the morning saw the latest employment data with wage metrics pretty much bang in line with expectations while the unemployment measures, via both LFS and Claimant Count, ticked higher. A point which was ultimately taken dovishly with markets now just about fully pricing a 25bps cut in June and another in November. However, it is worth highlighting that the cooling labour market alongside wages being sticky at relatively high levels could present a quandary for the BoE if this narrative continues (i.e. if wages don’t cool) in the months ahead.


• Reporting/data which Gilts welcomed and, alongside continuing FOMC bullishness, saw the benchmark gap higher by 24 ticks before extending by 25 more to a 92.81 peak; the highest it has been since March 4th.


• Of course, it remains to be seen what exactly the Chancellor does and how much headroom she claws back for herself after her GBP 9.9bln of “golden rule” space was entirely eroded by yield upside, weak growth (ex-Dec.) and softer than expected tax receipts.Reeves aside, the weak European risk tone will also be assisting the benchmark while Gilts also await the BoE this afternoon where an unchanged outcome is expected with a 7-2 split and a lot of focus on the dissenter(s) commentary and general language on tariffs and the path ahead.

20 Mar 2025 - 10:15- Fixed IncomeData- Source: Newsquawk