EUROPEAN FIXED UPDATE: Benchmarks continue to pullback from Thursday's peaks

USTs: -8 ticks, 113-12+

• A softer start to the final session of a packed week. Today’s docket is a little lighter stateside, University of Michigan is the main data event while scheduled speakers are light aside from POTUS on Fox at 13:00BST, an interview likely to focus on Charlie Kirk.


• Currently, USTs are lower by a handful of ticks in a thin c. five tick range which is comfortably within Thursday’s 113-09 to 113-29 band; despite data over the last few days, USTs are set to end the week near-enough unchanged vs the 113-13+ open on Monday. A dynamic in play as despite the interesting data and moves seen on the release, the overall narrative of a 25bps cut next week and likely some discussion around and/or vote(s) for 50bps hasn’t really changed.


• For reference, markets currently imply just under 27bps of easing this month i.e. a 25bps cut is priced with around a 7% implied probability of 50bps.


• September aside, Treasury Secretary Bessent met this week with Warsh, Lindsey, and Bullard regarding the Chair position. Will be speaking with sitting officials post-blackout. His goal is to add one or two names to the list of candidates.

Bunds: -30 ticks, 128.79

• Softer, continuing to pullback from the 129.38 peak that printed yesterday in reaction to US weekly claims. Entered today’s session just above the 129.00 mark but has since slipped below the figure and is at a 128.84 trough.


• Very much focussed on the post-ECB sources. In short, a move in October is off the cards (-1.3bps implied) with policymakers generally of the view that further easing is not required to get inflation to the 2.0% target; however, the December meeting (-3.8bps implied) is the point to review this when new forecasts will be available including the first look at 2028.


• Commentary from ECB members this morning has stuck to this view, with Muller saying rates are in the correct place, Kazaks placing emphasis on December. Villeroy, regarded as one of the more influential ECB members, said the downward risks to inflation outweigh the upward ones (reminder, 2025 HICP Y/Y view was lifted though by less than expected).

Gilts: -6 ticks, 91.57

• Just in the red, but outperforming peers. Outperformance that is a function of the morning’s growth data. Where the headline metrics were as-expected for the M/M and 3M/3M, the Y/Y missed consensus and the manufacturing/production breakdown was very weak, printing beneath the forecast range.


• Notably, the M/M only just avoided being a negative print, helped out by some favourable 1dp rounding. A series that was sufficient to lift Gilts to a 91.75 peak, posting gains of 11 ticks at best.


• However, as the morning progressed this strength has waned and the benchmark is well off best, but still outperforming peers. The data has had no impact on BoE pricing, with markets not looking for a move until around March 2026.


• That aside, UK specifics light aside from continued dissection of what Labour officials did/didn’t know about Mandelson, somewhat of note ahead of Trump’s state visit next week.

OATs: -25 ticks, 121.88

• Awaiting the sovereign review from Fitch, due after the US close. Into this, OATs trade in-line with Bunds and the OAT-Bund 10yr yield spread holds just below the 80bps mark.


• Fitch has France at AA-, negative. Fitch last updated on March 14th, highlighting high levels of debt and a poor record of fiscal consolidation as points of weakness, adding the negative outlook is reflective of significant fiscal risks. At the time, the agency highlighted a “failure to implement a medium-term fiscal consolidation plan…” as a factor that could spur negative rating action.


• Events over the last few days have avoided the more extreme and worst case scenarios for the market of legislative or presidential elections respectively. However, the new PM has only had a few days to begin talks with political groups, and much of that would have been spent on shoring up support from Les Republicans after they seemingly split from the centrist bloc in the vote on Bayrou.


• Overall, the French fiscal situation has not deteriorated any further, and while the political one has avoided major damage it has not improved. It remains to be seen how Fitch will judge it; but, as a proxy, the OAT-Bund spread has been orderly around the 80bps mark and the ECB did not even discuss TPI at the meeting, according to President Lagarde.

12 Sep 2025 - 10:00- Fixed IncomeEU Research- Source: Newsquawk