EUROPEAN FIXED UPDATE: Bunds battered by Merz's fiscal reform, USTs await data and tariff updates

USTs: -9 ticks, 110-30

• Under modest pressure, following the lead from Bunds, but to a much lesser degree. Due to the German measures not having any direct fiscal implications for the US and as the region remains more focused on growth concerns; ISM Services & Factory Orders are the next points to watch on this alongside ADP ahead of Friday’s Payrolls.


• USTs have been down to a 110-27 base but have spent much of the European morning and APAC session holding at the 111-00 mark. Yields are bid across the curve with the belly leading, as has been the case in recent sessions.


• While pressured, the benchmark is essentially treading water as we await updates on the tariff front after Lutnick suggested that Trump could provide some adjustments to the Canada and Mexico measures as soon as today’s session, and of course the above data points.


• As a reminder, Fed’s Williams spoke on Tuesday and remarked that policy is appropriate where it is with rates still in restrictive territory. In terms of points to look out for he flagged the UoM Inflation series as one to keep an eye on

Bunds: -220 ticks, 130.06

• Under marked pressure following the CDU, CSU and SPD leaders announcing an agreement on the first phase of debt break reform which they hope to pass in the next week as such get through under the current Bundestag configuration where a two-thirds majority for constitutional reform can be attained.


• Measures include a special EUR 500bln 10yr fund for infrastructure investments, changes to the debt brake to exempt defence spending of more than 1% of GDP from such rules, a loosening of the regional balanced budget requirement and a new instrument to provide EUR 150bln of loans.


• Newsquawk analysis on this, the initial reaction, why Merz is pushing it through in the ‘old’ Bundestag and points to watch for available at 07:50GMT on the headline feed.


• At most, the planned reform has weighed on Bunds by over 250 ticks to a 129.66 trough vs Tuesday’s 132.24 close. Pressure which occurred late doors on Tuesday after Merz’s remarks, continued in APAC trade as the risk tone benefited from the China two-sessions and ultimately accelerated in the early European morning as the risk tone lifted further and the potential issuance implications of the above reform were digested.


• Since, Bunds have made their way off the 129.66 base and are back above 130.00 with support coming via downward revisions to some Final PMIs this morning, as the equity rally took a slight breather and on profit taking from the marked bearish action.


• For yields, the pressure has lifted them across the curve but with a clear steepening bias with the short-end hovering around gains of 10-15bps while the long end has seen upside in excess of 20bps at points. Long end lifted by the fiscal implications while the short end is, relatively speaking, kept in check by potential Trump tariffs and ahead of the ECB on Thursday.


• Within Europe, the action has sparked significant spread narrowing with the BTP-Bund 10yr yield spread below the 100bps mark and the OAT-Bund spread testing 65bps to the downside.

Gilts: -140 ticks, 92.10

• Softer following the lead from Bunds. Trading much closer to Bunds than USTs in terms of magnitudes with Gilts down to a 92.11 low at worst vs the 93.50 close on Tuesday.


• Pressure which comes as Gilts play catchup to the Merz announcement, with USTs having already reacted in Tuesday’s session, and as the focus returns to the UK’s own fiscal fortunes.


• On this, multiple outlets have reported that Chancellor Reeves is to present the OBR with her latest potential fiscal adjustments which the BBC, citing sources, reports include several billion pounds of draft spending cuts to welfare & other departments. The FT outlines this as a plan to rebuild finances which are seen as being GBP 10bln worse than at the time of the October budget.


• Reports which underscore the delicate situation the Chancellor finds herself in in terms of the balancing act between the Labour party’s political pledges and balancing the UK’s books; updates which have likely added another modest bearish factor to Gilts, as the clock ticks down to the OBR’s 26th March forecasts.


• Most recently, no move to a strong UK auction which saw a b/c in excess of 3x.

05 Mar 2025 - 10:20- ForexEU Research- Source: Newsquawk