EUROPEAN FIXED UPDATE: Bunds boosted as Merz fails to become Chancellor in the first vote, Gilts underperform

USTs: -1 tick, 111-00

• Holding around the unchanged mark in a 110-27+ to 111-03 band. Came under modest pressure overnight on the return of China and generally supportive tone, despite weak Chinese PMI; though, once again, Japan was on holiday and as such conditions were thinner than normal with no cash trade.


• As cash trade resumed the pressure in benchmarks intensified a touch, supporting yields and resulting in some modest steepening. However, USTs began to pick up alongside fixed income generally amidst commentary from the HKMA that they are diversifying into non-US assets. The update had more of an impact on US equity futures and the DXY than it did on Treasuries.


• For Treasuries specifically, the HKMA said it has been lowering its duration in UST holdings. This added to the steepening bias seen this morning, 2s30s higher by over 5bps.


• Ahead, supply is the main scheduled event stateside in the form of a 10yr tap. Follows Monday’s 3yr sale which was much better than the prior, though comparisons are perhaps skewed by the last outing coming in the immediate aftermath of Liberation Day.


• Supply aside, President Trump is set to meet with Canadian PM Carney at the White House. Overnight, Trump said he bets that Carney will want to make a deal during his visit. Additionally, US Commerce Secretary Lutnick said a Canadian deal is really complex.

Bunds: -12 ticks, 130.95

• Initially under pressure in-fitting with the bias from USTs overnight. Notched a 130.69 session low, matching Monday’s base, early doors. Thereafter, the benchmark began to lift off lows and was largely unaffected by modest upward revisions to Final PMIs for April.


• As discussed in USTs, modest support filtered through for the complex alongside the HKMA announcement and the knock to the risk tone that stemmed from this. However, Bunds remained in the red and failed to breach the overnight 130.88 peak at this point.


• More recently, Bunds jumped by almost 30 ticks to breach the 131.00 mark as CDU/CSU leader Merz fell just six votes short of a Bundestag majority in the vote to appoint him as Chancellor. Something which has never happened in Germany before.


• Upside in Bunds comes as Merz not securing a majority presents risks to his Chancellorship, the CDU/CSU-SPD coalition and possibly the implementation of recent fiscal reform. However, the concern at this stage is caveated by the fact that Merz only missed a Bundestag majority by a very small margin.


• There can be up to two more votes in the current format, the next likely on Friday according to Handelsblatt; but, Politico reports it could be as soon as today as the AfD wants to bring it forward - awaiting clarity. If Merz has not attained a Bundestag majority i.e. 316/630 votes on the third ask, then the threshold is reduced to a relative majority of just those who vote i.e. abstentions do not count against him.


• Amidst this, Bunds have been as high as 131.08.

Gilts: -62 ticks, 92.54

• The clear underperformer in catch-up play from Monday’s UK Bank Holiday. Gapped lower by 29 ticks at 92.88, the session high, before slipping to a 92.32 base in short order. Currently holding just off that low but in close proximity to it.


• Support features at 93.16 from May 1st before the figure and then recent lows at 92.96 (29th April), 92.84 (2nd May) and 92.79 (28th April).


• PMIs for April were subject to modest upward revisions, but in-fitting with EGBs spurred no real reaction in the benchmark.


• Elsewhere, attention on overnight press reports that senior No. 10 officials are considering changing the Labour position on the winter fuel payments given the mass opposition to the means-testing of such payments; the Guardian scoop on this notes that a full u-turn is unlikely

06 May 2025 - 10:00- ForexEconomic Commentary- Source: Newsquawk