EUROPEAN FIXED UPDATE: Gilts continued to slip early doors, Bunds bounced marginally into the green

Bunds: +10 ticks, 128.91

• A softer start to the day, continuing the price action seen on Tuesday but holding above yesterday's 128.68 low.


• Thereafter, a bout of pressure to a 128.63 trough, with downside of c. 15 ticks occurring amid a volume spike just after the cash equity open and the morning’s first PMI. The Spanish Services figure came in shy of consensus, though internal commentary was strong.


• The move proved short-lived as Bunds unwound this pressure into subsequent PMIs. Data featured downward revisions to the EZ figures which followed a significant downward revision to Germany’s Services print, unexpectedly taking the measure into contractionary territory.


• Metrics that spurred some modest upside in Bunds, continuing the lift off lows and into the green seen in the 30-minutes before, ultimately taking the benchmark to a 129.00 high with gains of 19 ticks at best.


• Ahead, Bund supply due after Tuesday’s Schatz auction. Supply is a focus of the week after Tuesday saw a record EUR 49.6bln of supply hit the market in Europe, lifted by UK and Italian syndication.

OATs: +13 ticks, 121.24

• The main update has been an interview with Finance Minister Lombard to the FT, the Minister outlined that the toppling of PM Bayrou next week (looks all but certain, currently) would require fresh concessions to be made to the left in order to secure support for the fiscal package. A package that is currently targeting a deficit cut of EUR 44bln.


• Concessions would likely include a moderation to the deficit reduction plans, the Socialist Party (PS) is looking for a EUR 22bln headline figure, financed in part by a wealth tax. Lombard’s interview, in which he outlines that the PS would be his first call if Bayrou fell, is seemingly him setting out his stall for PM; an appointment that could work seeing as the FT points out, that he has good relations with the Socialists.


• PS aside, one point to note picked up by Politico, is that during a meeting of The Republicans (LR) several MPs have outlined that they may abstain in the vote rather than move against Bayrou, as their constituents tell them not to add to the crisis; nonetheless, this does not change the arithmetic anywhere near enough for Bayrou.


• Looking again to the potential post-Bayrou era, the feeler Lombard has seemingly put out to the Socialists has already run into opposition from LR, as the right-leaning gov’t coalition member has made clear that they will not be in a broader coalition with PS.


• Overall, the above updates do not change the landscape significantly but instead highlight the challenges that any French PM will face in trying to form a working coalition behind fiscal reform under the current parliamentary arithmetic, a reality that keeps the prospect of President Macron dissolving parliament and calling fresh legislative elections alive.


• OATs are firmer this morning, trading broadly in-line with their German counterpart thus far. As such, the Bund-OAT 10yr yield spread remains steady around the 80bps mark.

Gilts: -11 ticks, 89.65

• Confirmation this morning that the Treasury will unveil the Autumn Budget on November 26th, confirming a Huffington Post scoop.


• In wake of Tuesday’s significant moves, focus on the UK’s fiscal situation has intensified with an FT piece of note where both Vanguard and former BoE member Saunders outline a view that Reeves needs to find some new spending cuts, to accompany the expected tax increases. Specifically, Vanguard’s Hallam says the market wants to see some sign that Labour could attain savings similar to those pledged under the (abandoned) welfare reforms.


• Price action this morning began with a continuation of Tuesday’s sell off, Gilts as low as 89.36, 24 ticks below Tuesday’s base. However, the magnitude of this has waned in-fitting with the upticks discussed in EGBs, Gilts currently some 25 ticks off that low but still firmly in the red. At the mentioned trough yields hit new highs, 4.86% for the 10yr, eyeing January's 4.925% peak, and 5.75% for the 30yr.


• Ahead, the BoE appears before the TSC to discuss the last policy announcement (subject to two rounds of voting, resulting in a 25bps cut). At the meeting the BoE updated on its QT programme ahead of the September announcement on plans for the next 12-months, where the pace is widely expected to be trimmed from GBP 100bln/yr to c. 75bln.


• A trim to this has become more likely given above long-end yield moves, though the impact of any action remains to be seen as the BoE estimated the programme to end-June had increased 10yr and 30yr yields by around 15-25bps vs the 325bps of upside seen in the 10yr over the period. As such, we look for any clues from the TSC on the September announcement.

USTs: -3 ticks, 112-01

• Directionally in-fitting with peers but with action contained to a thin 112-00 to 112-08+ band thus far. USTs await Fed speak Musalem and Kashkari, remarks that are intersected by a handful of data points headlined by JOLTS.


• JOLTS job openings data for July is expected to slip to 7.378mln from 7.437mln (last time out, the vacancy rate fell to 4.4% from 4.6%, while the quits rate was unchanged at 2.0%).


• Elsewhere, Treasury Secretary Bessent is reportedly planning to start a blitz of interviews on Friday in search of a candidate to be the next Fed Chair, according to WSJ.


• That aside, POTUS said they will be going to the Supreme Court today re. the tariff ruling and they need a quick decision. Elsewhere, but sticking with trade, Japan’s negotiator Akazawa is preparing to visit the US between the 4th and 6th of September.

03 Sep 2025 - 09:55- Fixed IncomeEU Research- Source: Newsquawk