EUROPEAN FIXED UPDATE: Contained ahead of ISM Services (no NPF today). Gilts await any insight from the OBR

USTs: -2 ticks, 112-27

• A slightly softer start to a much more limited session than initially scheduled due to the US government shutdown.


• USTs are currently pivoting the unchanged mark in a thin 112-26+ to 112-30+ band, entirely within yesterday’s 112-21+ to 112-31 range.


• Given the absence of NFP, the ISM Services figure is the main event today and likely to draw even greater attention and potentially spur a larger reaction than typical. The consensus expects the ISM services headline to fall slightly to 51.8 from 52.0 in September; the business activity gauge is seen falling to 51.8 from 55.0. As a basis for comparison, S&P Globalʼs flash US Services PMI Business Activity Index fell to 53.9 in September from 54.5 in August, marking a three-month low.


• Into the series, the odds of a Fed move in October have just retreated beneath being fully priced with a c. 97% implied probability at the time of writing, vs the over 100% we saw following the surprising negative ADP print earlier in the week.

Bunds: +4 ticks, 128.69

• Contained in a very thin range of just over 10 ticks. Updates in the space, including ECB’s Lagarde saying that Knot would make a good ECB President; no reaction in Bunds to this, but potentially adding to the slight bearish bias we have seen at points, given he was regarded as a hawk during his tenure at the ECB.


• Elsewhere, PMIs were in focus with the final Composite and Services metrics subject to downward revision pretty much across the board. For Germany, HCOB wrote "Cost inflation in the service sector has risen for the second month in a row and is at an above-average level". A point that adds to the narrative that the ECB is potentially at terminal, with just 3bps of easing currently implied by end-2026.


• Elsewhere, France’s political situation is back in focus as PM Lecornu commits to not using Article 49.3 to push through fiscal reform, a point seen as a significant concession to the opposition. It remains to be seen what, if anything, Lecornu will get in return for this, though. Very modest reaction in OATs to this update.

Gilts: +15 ticks, 90.93

• Trading a little better than peers, but is also essentially unchanged in the session. No move to the region’s final PMIs, which were subject to downward revisions, as was the case in Europe. Firmer by a handful of ticks in a modest 90.77-94 bound.


• While the aforementioned US events will draw the majority of market focus and likely dictate price action, Gilts in particular are waiting for any leaks around the OBR’s first forecast round being presented to Chancellor Reeves.


• The update is expected to, from the Chancellor’s perspective, be bleak with a significant downgrade to productivity expected and potentially taking the fiscal hole Reeves needs to plug to c. GBP 30bln. A figure that, of course, could increase between now and the final forecast round, depending on domestic/global macro developments.


• Another blow to Reeves potentially stems from the assumptions around fuel duty, as it stands, the OBT assumes the 5p cut will be reversed in the spring after a budget and then rise with inflation. This has not been the case. As such, the OBR reportedly wants to end that precedent, according to the Sun. This change would add to Reeves' fiscal woes by around GBP 4.5bln.


• Aside from updates around the OBR, we also await remarks from BoE Governor Bailey.

03 Oct 2025 - 10:25- Fixed IncomeEU Research- Source: Newsquawk