EUROPEAN FIXED UPDATE: Gilts underperform after another gov't u-turn, USTs await data & House progress

USTs: -6 ticks, 111-22

• In the red, but only by a handful of ticks after ending Tuesday’s session with losses of just under 10 ticks, having faded from an initial 112-12 peak, driven higher by the risk tone, to a 111-22+ low and eventual 111-27+ close amid strong US data. As a reminder, Powell also influenced Tuesday’s action and sparked a brief bid (just before the US data) via remarks which didn’t take July off the table.


• Today, USTs hold at the low-end of a 111-21+ to 111-30+ band. A tick below Tuesday’s base and notching a fresh WTD low by half a tick. If the move continues, there is a bit of a gap until 110-25 from the week before.


• The docket is a busy one, featuring Challenger Layoffs and ADP ahead of NFP tomorrow (early, due to 4th July closures). ADP is seen climbing to 95k (prev. 37k) with a 20-130k forecast range. For reference, NFP exp. At 110k (prev. 139k), with a 50-160k range.


• No Fed officials are due to give remarks today, with Bostic (2027 voter) the only FOMC member due tomorrow. Bostic is speaking post-payrolls on monetary policy; recently, the hawkish member has said he still expects one 2025 cut and cautioned that the pause could be more extensive than people think; markets currently imply 63bps of easing by end-2025, i.e. two 25bps moves and 50/50 for another.


• Elsewhere, the Senate passed Trump’s Reconciliation Bill and sent it back to the House to debate. House Speaker Johnson said they will be voting on Thursday at the latest while House Rep. have intimated they will consider final passage immediately, despite many taking the view the Senate went further than desired in its amendments.


• In short, the bill getting to Trump on July 4th remains a possibility. But, any significant opposition in the House will likely derail the timeline.

Bunds: -35 ticks, 130.13

• A softer start to the day, driven lower by the firmer European risk tone and as the benchmark pulls back from Tuesday’s gains, though the eventual close 28 ticks higher on Tuesday at 130.49 was markedly off the earlier 130.73 peak, a pullback driven by USTs.


• Sintra is ongoing and we have already had a few speakers this morning but nothing particularly significant from them. Ahead, while we have ECB’s Lane and Lagarde scheduled we do not expect a text from either and as they are speaking on communications and providing closing remarks at Sintra respectively, the topics are not necessarily conducive to fresh monetary insight.


• As it stands, Bunds at the low-end of a 130.08 to 130.50 band. One that is 10 ticks below Tuesday’s base but a similar amount clear of the WTD 130.00 base. If breached, we look to 129.92 and then 129.30 from the last two weeks of May.


• Ahead, aside from the discussed ECB officials, supply is due with Germany set to tap its 2.6% 2035 line for the first time.

Gilts: -50 ticks, 93.04

• Another u-turn by the government was required to pass the heavily amended Welfare Reform Bill. The main concession yesterday was waiting for the Timms review (Autumn 2026) for changes to PIP eligibility, at a cost/savings-loss of GBP 4.5bln/yr by 2029.


• Furthermore, IFS calculates that while the original bill could have saved around GBP 5.5bln by the 2029 period, the “watered down bill is not expected to deliver any savings over the next four years”.


• On the Autumn Budget, the IFS surmises the amended bill will “doubtless intensify the speculation over the summer about which taxes may rise and by how much.”, furthermore questioning how the u-turns may impact the government’s fiscal credibility.


• Amidst this, Gilts opened lower by 18 ticks and have since slipped another 38 to a 92.98 base. If the move continues, support features at 92.85 and 92.83 from last Friday and this Monday, respectively.


• Supply came in strong this morning, despite the above points of fiscal concern, though no significant move in Gilts to the 2028 tap.


• Elsewhere, a little bit of continued attention on yields after remarks by BoE’s Bailey on QT yesterday, remarks the likes of ING have interpreted as potentially pointing to a slowing in the pace of QT, given long-end yield upside recently. Amidst this, long-end yields lagged on Tuesday, with the 10yr lower by 3bps at most vs 7bps of downside for the 30yr at one point.

02 Jul 2025 - 10:15- Fixed IncomeEU Research- Source: Newsquawk