EUROPEAN FIXED UPDATE: Benchmarks in the red but off lows via a strong French auction & stagflationary UK data amid reports of a UK Cabinet reshuffle

USTs: -5 ticks, 109-18+

• In the red, weighed on overnight in tandem with JGBs on hawkish commentary from BoJ’s Tamura (hawk) who stated they must raise rates to at least around 1% in the latter half of FY25. Remarks which helped push JGBs to a 140.29 low overnight and offset strength from a robust 30yr JGB sale.


• More broadly, the benchmark is trimming some of the upside seen on Wednesday with yields picking back up after their pullback. Thus far, USTs down to a 109-16 base vs Wednesday’s 109-29 peak; if the move extends, support factors at 109-02 before the figure and then 108-25+.


• For the US, newsflow this morning has been light and we look ahead to weekly jobs data though this does not cover the BLS survey period. Challenger also due alongside Q4 labour costs which are seen jumping to 3.4% (prev. 0.8%). Amidst this, Fed members are in focus with voters Jefferson & Waller due in addition to 2027 voter Daly.

Bunds: -16 ticks, 133.39

• In the red and spent much of the morning towards the 133.14 session low. Pressure which comes as the complex unwinds some of the pullback in yields that was a feature of yesterday’s session for global benchmarks.


• Specifics this morning are somewhat light, data out of Germany and various nations Construction PMIs not moving the dial. Docket ahead is a light one for the region though markets have plenty to focus on with the BoE, US data and Fed speak factoring.


• If the pressure returns, then support comes into play at 133.00 before lows from Tuesday and Monday at 132.72 and 132.41.


• More recently, the benchmark derived support from the very strong French tap (see OATs), lifting Bunds by around 15 ticks off that low but with a similar amount to go before the 133.53 peak is revisited.

OATs: -8 ticks, 124.47

• On Wednesday, PM Bayrou survived (as expected) the two censure motions against him which means the 2025 Budget has now passed the National Assembly. However, there are still numerous hurdles to parts of the budget ahead.


• The budget as it stands is in-line with France’s pledge to reduce the 2025 deficit to GDP ratio to 5.4%; however, the plans underpinning this target leave only very limited room for unforeseen expenditure or for a slip in the relatively optimistic GDP forecast French officials have used.


• In the immediacy, the Senate will vote on the budget today, though Le Monde believes it should pass without issue. Next up, after the censure motions were rejected yesterday Bayrou once again triggered Article 49.3, this time on the next part of the Social Security Budget (the section Barnier fell on); LFI immediately said it will oppose this, though the censure motion is once again unlikely to succeed.


• The passing was well received with the OAT-Bund 10yr yield spread dipping below 70bps yesterday evening and again this morning. However, OATs have since found themselves the modest EGB underperformer with the spread widening back to near 73bps ahead of chunky supply.


• Supply which was well received with a blockbuster cover for the 2036 line and a strong reception across all the lines. The benchmark had already lifted off a 124.07 trough ahead of the auction with the results then lifting it by around 25 ticks to a 124.51 peak, causing OATs to now be the marginal EGB outperformer though still in the red.

Gilts: +9 ticks, 93.83

• The above bearish bias was present but to a much lesser extent as we count down to the BoE, Newsquawk preview available. A poor set of data and general lifting in the fixed income complex has brought Gilts just into the green.


• In brief, the BoE is expected to cut by 25bps (95% implied probability) in a likely 8-1 split with Mann expected to be the lone hawkish dissenter. After the decision, attention turns to any adjustments to the growth and inflationary outlook, in the context of recent stagflationary data prints. Additionally, whether the commentary around a gradual approach and restrictive is retained.


• On the point of stagflation, Gilts were pulled off lows by a particularly dire UK Construction PMI for January, which printed below the forecast range and surprisingly fell into contractionary territory; internal commentary from the release points to a stagflationary UK economy. A release which saw Gilts jump from 93.55 to 93.70 and thereafter to a 93.84 peak.


• If this continues and Gilts manage to extend further into the green then resistance features at 93.85 from earlier in the week before the 94.00 mark and then a modest gap to 94.50 from late-December.


• Most recently, and pertinently for the UK, the Daily Express reports that PM Starmer is said to be considering removing Chancellor Reeves and replacing her with current Home Secretary Cooper, the article frames this as a move to bolster growth. However, it remains to be seen how the shift would be digested as while a pro-growth move would be welcome a reshuffle this close to the next OBR update could cause its own jitters and issues for the benchmark.

06 Feb 2025 - 10:25- Fixed IncomeData- Source: Newsquawk