EUROPEAN FIXED UPDATE: Bunds await coalition and/or spending updates

Bunds: U/C, 132.39

• At the top-end of a 131.87-132.45 band with the benchmark essentially flat as participants continue to digest the German election and await clues on coalition talks; the high printed just before the EZ wage tracker as the general risk tone took another modest leg lower.


• The tone between CDU’s Merz and SPD’s Klingbeil seems constructive with Politico reporting that a call was scheduled between the officials yesterday evening. Ahead of this, Klingbeil stuck to the tone of other officials with regards to coalition talks and placed the onus on CDU to commence them, remarking "We neither want to be in a government, nor do we want to refuse to do so.".


• Coalition building aside, there is increased focus on the debt brake after the Greens proposed reconvening the current parliament ahead of the first sitting of the new parliament on March 25th to reform the debt brake and/or decide on special funding for the military. While possible, the prospect of the current Bundestag being able to gather a majority around debt brake reform (reminder, the Traffic-Light coalition collapsed due to debt break disagreements) is slim, with the current (outgoing) SPD Finance Minister having already spoken out against it.


• Though, agreement on a defence specific measure is more realistic and is something incoming-Chancellor Merz is said to be exploring for the current parliament. FT reports he will be speaking with the SPD, FDP and Greens on this shortly.


• Reminder, attaining a two-thirds majority in the new Bundestag will require Merz getting support from SPD, Greens and crucially Die Linke. This is due to their being a blocking minority of Die Linke and AfD.


• On the point of defence spending, the FT cites the Polish Finance Minister as saying some of the options being explored include a rearmament bank which, depending on its structure, could see the funding distributed as grants and thus not impact fiscal rules; a narrative which is perhaps preventing Bunds from slipping into the red despite the markets focus on increased spending.


• Note, as mentioned in prior commentary it is worth keeping an eye on spreads (i.e. BTP-Bund) if/when the conversation cements around funding for defence spending coming from member nations or being an EU-wide measure; joint borrowing should, all things equal, see spreads narrow.


• Elsewhere, the latest ECB EZ wage tracker moderated from the prior in-fitting with proxies while an extensive text release from ECB’s Nagel largely focussed on the Bundesbank's accounts while monetary comments were in-fitting with his hawkish bias. No reaction to either event.

USTs: +11+ ticks, 110-07

• A firmer start to the session with the benchmark picking up a touch on yesterday’s strong 2yr outing before grinding marginally higher overnight and then lifting back above the 110-00 mark to a 110-09 peak in the European morning, a high the benchmark has remained in proximity to since.


• Upside which occurred in limited newsflow but was seemingly a function of the tepid risk tone with participants cautious into the week’s data but firstly looking to Nvidia numbers after-hours on Wednesday, into which options currently point to an 8% swing.


• Remarks from Fed’s Logan did not touch on monetary policy though on QT the 2026 voter said once QT ends it would make sense to overweight purchases of shorter dated securities and floated the idea of a discount window loan facility. No reaction in USTs to the text release.


• Ahead, the speakers continue with Barr & Barkin due before POTUS signs his latest executive order. Amidst that, the US will sell 70bln of 5yr notes; follows a 2yr which saw a slightly softer b/c than the prior but still a strong level of demand, particularly for the indirect figure.

Gilts: +25 ticks, 92.90

• Firmer, somewhere between USTs and Bunds in terms of magnitude as the benchmark acknowledges both the tepid risk tone and reports suggesting the UK could get involved in European-wide defence spending.


• As above, the FT article on such spending highlighted that the UK is involved in such talks with a source cited saying the UK Treasury “is interested in” the idea of a rearmament bank for such funding. Given that structuring spending in this way would limit the impact on Reeves’ fiscal position.


• As such, Gilts find themselves in the green and holding towards the top-end of a slim 92.67-91 band. Resistance features at the figure and then just above at 93.07 before the February 13th peak at 93.50.


• The UK docket is, once again, focussed on the BoE’s BEAR conference though the only scheduled appearance today comes via Chief Economist Pill who will provide closing remarks.


• Yesterday, we heard from dove-Dhingra who said the MPC has different definitions of “gradual”, which for her does not mean 25bps/quarter. Adding that such a pace would leave rates restrictive all year.

25 Feb 2025 - 10:15- Fixed IncomeEU Research- Source: Newsquawk