EUROPEAN FIXED UPDATE: Gilts gap higher post-data though benchmarks await the FOMC

Analysis details (10:29)

• Benchmarks began the European morning with a modest positive bias after a well-received US 30yr auction but with the tone in EGBs & USTs relatively tentative ahead of the FOMC.


• Once again, Gilts buck the trend having gapped higher from Tuesday’s 98.73 close to a 99.02 open before extending in short order to the current 99.48 session high, driven by soft October growth data. This is the high point for the March’24 contract and as such attention returns to yields, where the UK 10yr is down to 3.90% its lowest since May when it was around 3.6%; a period where yields were recovering after pressure from the banking crisis around SVB and Credit Suisse, among others. Alongside this, a modest dovish reaction occurred in BoE pricing for the entirety of 2024 with 93bp (prev. 88bp) of easing implied. While the growth metrics are poor, they are not likely to have any sway on the December announcement. However, it is plausible the metrics could factor into the vote split (exp. 6-3, hawkish dissent) or the extent to which the statement pushes back on pronounced dovish market pricing.


• The morning saw auctions from the UK and Italy. Firstly, the 2053 Gilt sale was well received with a b/c of 2.70x from the prior 2.34x even given the lower yield offered, given the influence of dovish market pricing, though the auction sparked no sustained movement in Gilts. Italy’s final outing of the year was similarly robust, but again sparked no real follow through to BTPs which trade in-line with core counterparts.


• Bunds are a touch firmer, holding towards the midpoint of 135.07-135.41 parameters and as such within Tuesday’s 134.80-135.60 bounds. Overall, action for EGBs has been fairly contained as participants begin preparing for tomorrow’s ECB but before that the FOMC, where all eyes are on how the statement and Powell react to the recent trend of data and pronounced dovish market pricing. USTs are essentially unchanged heading into the announcement with yields incrementally lower across the curve.


• Finally, and for Germany specifically, we have recently seen a Reuters sources piece which intimates that the 2024 budget deal will not see the debt brake suspended once again after being retroactively suspended for 2023 following the constitutional court ruling. Details are expected at a 11:00GMT briefing. If correct, then it could result in a lower borrowing amount than would have otherwise been the case (i.e. reduced bond issuance) and potentially have ramifications for various spending commitments that the government has already outlined.

13 Dec 2023 - 10:29- Fixed IncomeResearch Sheet- Source: Newsquawk