EUROPEAN FIXED UPDATE: EGBs recoup from Monday’s pressure while Gits lag post-Bank Holiday

Analysis details (11:05)

• EGBs are bid as the benchmarks recoup from yesterday’s pressure which saw Bunds down by over 200 ticks at worst with little by way of fresh fundamental catalysts behind today’s move, though the continued easing in European gas pricing has likely assisted.


• Thus far, commentary has stemmed once again from ECB’s Chief Economist Lane though his remarks were decidedly less interesting that those seen in yesterday’s session where, to surmise, he seemingly outlined a preference for taking a more gradual step-by-step approach to hikes, but has clearly not ruled out a 75bp move next week – as some sources/officials have alluded to wanting at least a discussion around.


• Currently, Bunds are firmer by around 30 ticks and reside some 40 ticks off the earlier 149.32 peak, which is itself a full point above the 148.32 session low. For reference, yesterday’s trough was 147.92 while an extension above the earlier peak brings 149.46 and 149.76 into play. From a yield perspective, the associated 10yr is comfortably sub-1.50% once again after extending as far as 1.54% on Monday, a pullback that has occurred alongside market pricing for the September ECB implying around 60bps of tightening, or a ~40% chance of 75bp with 50bp full priced. The next read into the ECB’s thinking may arise from ECB’s Vasle though, he is not a voting member at the September gathering; afterwards, German mainland Prelim. Inflation is scheduled and thus far the regionals chime with mainland expectations for a YY uptick vs prev.


• Amidst this, the BTP-Bund spread remains steady around 230bp as participants juggle the upcoming ECB and focus on the magnitude, QT and TPI for the event alongside looming Italian elections. Sizeable issuance across the 5-10yr bucket for Italy drew slightly softer covers than the last outing though reaction was essentially non-existent given the above considerations looming.


• Returning to the core but switching to the UK, Gilts are dented by over a full point though roughly 20 ticks off lows as the region catches up from its Bank Holiday and the hawkish EGB action that took place. Domestically, focus remains firmly on the energy situation ahead of a new PM on September 5th and for details around support measures before the Q4 Ofgem cap is implemented on October 1st. Reminder, tomorrow the ONS is set to update on the classifications for the energy bill scheme, which Pantheon thinks will be treated as a fiscal transfer and thus electricity/natgas-inflation will increase by almost 80% (Ofgem adjustment) in October. Evidently, such an increase will be of note for the BoE and given the inflation backdrop Credit Suisse now looks for an additional 25bp worth of tightening to 3.00% by end-2022.


• Finally, USTs are in-fitting with EGBs and look towards commentary from the influential Fed’s Williams at the WSJ after remarks from 2024 voter Barkin on the Economy & Inflation. Currently, the yield curve is a touch flatter though this is once again mixed.

30 Aug 2022 - 11:05- Research Sheet- Source: Newsquawk