EUROPEAN FIXED UPDATE: Firmer trade amid the weakened risk tone, Gilts lead after data, OATs await Lecornu

USTs: +10 ticks, 113-15

• Bid, firmer by over 10 ticks to a 113-16+ high. Strength this morning comes on the back of the downbeat risk tone as China retaliates. Upside that has driven the benchmark to a fresh high for the month, with the next points of resistance at 113-21, 113-25+ and then the 113-29 September peak.


• Specifically, China's MOFCOM announced that it is taking countermeasures against five US-linked firms and outlined that the US cannot have talks while new restrictions are being threatened. An announcement that follows Friday’s Truth post by Trump around potential new tariffs, a post that weighed on the risk tone Friday evening. However, Trump then softened his tone a touch over the weekend.


• As it stands, we await a response from US officials and/or Trump himself on the countermeasures.


• Elsewhere, the docket is packed with Fed speak via voters Bowman, Waller, Chair Powell and 2025 voter Collins.

OATs: +36 ticks, 122.45

• A packed agenda for French politics. The main update this morning came from the French fiscal watchdog HCFP on the 2026 budget draft, a draft that was in-fitting with overnight sources. On the draft, HCFP described it as relying on overly optimistic scenarios and ambitious spending restraint that would be difficult to implement.


• Perhaps most pertinently today, PM Lecornu’s General Policy Statement is scheduled for 14:00BST. The statement should take no more than 90 minutes, afterwards other party leaders can respond. Following the statement, Socialist Party (PS) President Vallaud will respond in Parliament, though he is not according to Politico expected to announce the stance of PS at that point.


• Heading into the statement the PS is split into three roughly evenly sized groups, explains Politico citing a source. One third are tempted to censure Lecornu’s government, another would prefer not to but this is contingent on concessions being provided while the final third are undecided. PS support is vital as the majority of parties outside of the centrist-bloc have indicated they would vote to censure Lecornu’s 2nd attempt at a government; censure motion expected later this week, likely on Thursday.


• As a reminder, the PS conditions are a commitment by Lecornu not to use Article 49.3 (something he has already said he could agree to) and a rowing back on planned pension reform.


• In short, as things stand, PS supporting or censuring the Lecornu government will be the primary factor in determining how long it survives and whether Macron has to attempt to appoint another PM or accept fresh legislative elections. Though, to pass fiscal measures thereafter the bloc will need to draw support from more than just PS.


• Despite all of this, OATs trade only marginally softer than peers, posting gains of just over 40 ticks at most vs strength in excess of 50 at best for Bunds. However, this dynamic has been sufficient to widen the OAT-Bund 10yr yield spread by near 1.5bps at most, to a 84.7bps peak; the YTD high is 88.2bps, 2024’s peak was 90bps.

Bunds: +38 ticks, 129.79

• Bid, given the market narrative outlined in USTs. No move to final German HICP for September this morning which was unrevised.


• At best, posted gains of 54 ticks to a 129.94 high just after the European cash equity open.


• For Bunds, the morning’s main event was October ZEW. The series came in softer than expected across the board and sparked some modest upside in Bunds, though well within earlier parameters.


• Ahead, a new Schatz line is scheduled and will be keenly watched to see if the recent trend of deteriorating German supply can be bucked by the slighter larger coupon on offer for the new line.

Gilts: +57 ticks, 91.81

• Outperforming after the morning’s jobs data. Opened higher by 45 ticks before climbing to a 91.81 peak with gains of 57 ticks at best. Stopping a tick shy of the 91.82 September peak; if the move continues, then there is a bit of a gap before the 92.70 August high.


• The morning’s data saw an unexpected jump in the unemployment rate, going against the view from the most recent MPC statement that there is less of an immediate risk that the labour market will loosen very rapidly. A point that serves as a dovish impetus.


• However, this is caveated on face value by the elevated wage figure (incl-bonus). Upside that the ONS attributes to the public sector, as some pay rises are awarded earlier than they were in 2024. As such, policymakers may look to see if this is a one-off or not. Furthermore, and offsetting the top-line figure, the data showed a welcome moderation of private sector wage growth.


• Ultimately though, a 4.7% ex-bonus and a 5.0% headline wage print are not consistent with further significant easing. The release sparked a modest dovish reaction in pricing, seeing the odds of a cut in November lift to around 16% vs sub-10% pre-data. More pertinently, December is approaching 50/50 while a cut is now priced by March 2026 vs April 2026 beforehand.


• Before a decision can be taken in December, the BoE and markets keenly await more timely data (particularly CPI) and the Autumn Budget.

14 Oct 2025 - 10:15- ForexEU Research- Source: Newsquawk