EUROPEAN FIXED UPDATE: Bunds briefly bounce on Lagarde

USTs: +3 ticks, 108-26

• Awaiting fresh tariff updates from US President Trump. Overnight, Trump spoke about potential measures on China and the EU. As it stands these remain hypothetical with the President yet to initiate measures though the February 1st date he continues to reference is moving ever closer.


• USTs are firmer by a handful of ticks and have been moving directionally with EGBs (see Bunds) in the European morning. Given we are in the Fed’s blackout period we await impetus from 20yr bond supply this evening and of course are attentive to anything fresh from or around the new US administration.


• Holding at the upper-end of 108-19 to 108-28 bounds, with yields lower across the curve which itself is flattening very modestly.

Bunds: +11 ticks, 132.06

• Saw some modest pressure early doors on the UK PSNB data (see below), thereafter the main move of the morning came via ECB’s Lagarde at Davos. An interview from which the main takeaway was Lagarde seemingly not being too concerned about US tariffs at this point in time, a reading-between-the-lines assessment which drove EGB upside. As a reminder, Trump overnight said “...the EU will be in for tariffs.”.


• Specifically, Bunds were driven to a 132.22 peak as Lagarde spoke, posting upside of 28 ticks on the session at the time and setting a new WTD high, resistance now not seen until 132.57 from earlier in the month.


• However, the move proved relatively shortlived and has faded to leave Bunds with just modest gains. A pullback which occurred as Lagarde finished speaking and was perhaps influenced by more explicit/hawkish commentary around tariffs from the likes of Villeroy, who said it is too early to tell but inflationary effects could be expected.


• Session is headlined by numerous ECB speakers with Lagarde due again alongside the likes of Knot & Rehn.


• Supply wise, Germany enters the market with a dual-15yr tap (should go well) while syndication has continued in the bloc as Spain begins its 10yr outing with books currently in excess of EUR 150bln, a strong showing which follows blockbuster demand for French and UK syndications on Tuesday.


• Given this, Bonos find themselves the modest EGB outperformer.

Gilts: +16 ticks, 92.40

• Began the session on the back foot, gapping lower by 11 ticks after a much larger than expected December PSNB figure and an upward revision to the prior. Metrics which further illustrate the challenges the Chancellor is facing on the UK’s public finances. For reference, in an interview this morning Reeves stuck to her usual lines on the subject.


• On this, CapEco estimates that while UK yields have faded from recent high current levels leave the Chancellor with headroom of just GBP 2bln (vs. 9.9bln at the budget).


• However, this pressure proved relatively shortlived with Gilts lifting alongside EGBs (see above) to a 92.52 peak, eclipsing the 92.38 high from Tuesday. If the move resumes, resistance factors at 92.79 & 92.88.


• Ahead, the UK-specific docket is light and as such we await updates from Trump and/or his administration on tariffs.

22 Jan 2025 - 09:55- Fixed IncomeEU Research- Source: Newsquawk