EUROPEAN FIXED UPDATE: Benchmarks fade overnight gains as inflation dictates recent action

JGBs: -2 ticks, 138.91

• Counting down to the BoJ. Interest rate expected to be held at 0.50%. Focus much more on the tapering plans. Trading in-line with USTs overnight, briefly hit a 139.55 peak as geopolitical tensions flared and the latest tapering reports aired, since waned below 139.00 but is off its 138.75 base.


• As a reminder, JGBs have come under heightened focus in recent weeks and months and market dysfunction in the long-end, owing primarily to very low liquidity, a point that has been reflected by poor auctions and associated yields hitting multi-year highs.


• Amidst this, the BoJ is expected to slow the pace of its tapering plan. However, the change is not likely to be enacted until April 2026. Currently, the plan sees the bond purchase amount reduced by JPY 400bln a quarter. Multiple reports and sources look for it to be cut, with a rough consensus for the pace of taper to be halved to around JPY 200bln a quarter; Nikkei on the weekend the latest to report this.


• Given the focus on the long-end, participants are attentive to anything specific from the BoJ statement and/or Ueda on this matter. As a reminder, Japan’s Ministry of Finance is meeting with primary dealers on Friday to discuss this topic, the meeting could result in auctions being skewed towards the short- vs long-end at the next issuance update.

USTs: -4 ticks, 110-16+

• Currently softer. A pullback that comes after a brief spike to a 110-26 peak just after trade resumed, as desks digested the weekend’s geopolitical escalation between Iran and Israel. For a summary of pertinent geopolitical developments, see Commodities and/or the European Opening News.


• Thereafter, the benchmark waned and has been gradually under pressure since. Continuing to digest the inflationary implications of the geopolitical situation, the weekend’s news saw WTI and Brent get within around USD 0.20/bbl of Friday’s USD 77.62/bbl and USD 78.50/bbl peaks.


• As such, and despite crude since paring all of the sessions gains and moving modestly into the red, fixed benchmarks continue to pullback. Thus far, USTs are holding around Friday’s 110-14 base but did briefly move a few ticks below this to a 110-10+ low. If the move continues, 110-02 from June 10th before 109-29 and then a multi-session low a tick below; trough on June 6th and 11th.


• Ahead, the US docket is headlined by 20yr supply, the presence of which may be influencing some of the morning’s pressure in USTs. Elsewhere, US President Trump is due to speak on a number of occasions, firstly with Canadian PM Carney. And, of course, the benchmark remains attentive to any geopolitical update, both in the context of its status as a haven and for inflationary implications.

Bunds: -32 ticks, 130.46

• In-fitting with USTs. Hit a 130.86 peak overnight before fading into the early European morning, the narrative much the same as outlined above in USTs.


• Thereafter, a slight acceleration in the pressure was seen into and after the European cash equity open, which same benchmarks open firmer and extended into the green. Action that may factor into the relative underperformance of EGBs vs USTs at this point; as such, we are attentive to how USTs fare into the US cash equity open.


• Another point of pressure for EGBs comes on the back of European gas benchmarks, as Dutch TTF hasn’t been subject to the discussed pullback seen across the morning in crude benchmarks. A dynamic that leaves German yields firmer across the curve and the 10yr yield closing in on last week’s 2.59% peak, current best 2.58%.


• For what it's worth, no reaction to final Italian inflation for May despite the series being subject to a marked downward revisions. A dovish signal that has been overlooked given the more timely inflationary implications of above energy action.


• Overall, Bunds moved lower from their 130.86 high across the early European morning before hitting a 130.17 trough around 30 minutes following the cash equity open. A low that is within reach of last week’s 130.13 base.


• Ahead, ECB’s Nagel is scheduled after Cipollone, though no text is expected from the latter; earlier, Nagel said it is not sensible to signal either a rate pause or cut, given the exceptional uncertainty.

Gilts: -17 ticks, 92.48

• An echo of the above action but, given the later open, in a much shorter space of time.


• Opened with gains of 23 ticks, acknowledging the geopolitical tensions and gains seen in peers overnight. Thereafter, climbed another 11 ticks to a 92.53 peak, over a point shy of Friday’s best, before retreating into the red.


• Briefly dipped as low as 92.23 before stabilising around 20 ticks off that, but remains in the red by a similar magnitude.


• Specifics for the UK have been very light so far, docket ahead is equally sparse.

16 Jun 2025 - 10:00- ForexGeopolitical- Source: Newsquawk