EUROPEAN FIXED UPDATE: Gilts underperform on wage data though Bailey has pared some of this, EU joint issuance in focus

USTs: -8 ticks, 109-02

• Another softer start to the session. Action which comes as cash plays catch up to yesterday’s action and as such yields are firmer across the curve, steepening and outperforming European peers.


• Overnight attention on an extensive interview with Fed’s Waller (Voter, Dove) in which he noted, the Fed cannot let uncertainty about policy paralyse action and seasonal effects may be distorting data. He added that it is appropriate to keep rates on hold for now. Commentary which may have helped USTs to their initial 109-11 best just after trade re-opened given Monday’s US holiday.


• Thus far, USTs down to a 109-01 trough which is comfortably clear of Monday’s 108-26 base but some way from that session’s 109-15 peak, as USTs continue to gradually fade from today’s early-doors 109-11 best.


• Ahead, the docket is headlined by Fed’s Barr & Daly, both due to provide text and partake in a Q&A, but the market focus and price action is firmly on any tariff updates from POTUS and the outcome of talks on Ukraine which are currently underway between the US and Russia in Saudi Arabia.

Bunds: -33 ticks, 131.89

• Bearish action, though not to quite the same extent as USTs given the marked European pressure on Monday as leaders met to discuss how to fund additional defence spending.


• Unsurprisingly, given how hastily it was convened, there wasn’t much from the meeting though Eurasia’s Rahman has reported “Expectations now running high for an additional high-level emergency meeting on/around 24 Feb in Kyiv, hosted by the Ukrainian Govt."


• From any meeting, we are attentive to details on the size of the defence spending and then how the bloc (and the likes of the UK etc) intend to fund it. One possibility getting a lot of attention is joint EU borrowing. On this, Spain’s Finance Minister Cuerpo has remarked that common debt for public goods, i.e. defence, is a “no brainer”. Specifically referencing continuation of the post-COVID Next Gen. EU scheme which was funded via joint borrowing across the bloc.


• The prospect of further borrowing weighed on EGBs yesterday and has continued today, with Bunds moving below Monday’s 131.98 base to a 132.72 trough. Action which has driven yields higher across the curve and the long-end, which would be the focal point for any EU borrowing, is leading.


• Since, Bunds have bounced somewhat as the European risk tone deteriorates a touch as we are yet to see any breakthrough on negotiations regarding Ukraine with US-Russian officials meeting now in Saudi; though, the absence of Ukraine from these negotiations is noted alongside Russian Wealth Fund head Dmitriev saying progress is possible “in the next two months”.


• No sustained move to the German ZEW figures which came in firmer than expected across the board, ZEW puts this down to expectations of policy progress after this weekend’s election and assistance from recent ECB easing.


• As such, Bunds have made their way off the above low and are retesting the 132.00 mark to the upside. The early-doors peak is just above at 132.16 with resistance thereafter at 132.58 from Monday and then 132.94-97 from late last week.

Gilts: -38 ticks, 92.60

• Bearish action which is a function of the above factors outlined in USTs and Bunds alongside specific pressure from a hawkish set of employment/wage data. In the wake of this, market pricing continues to point to the next 25bps move occurring in June but thereafter the timing for a second move has just about been pushed from September to November; though, this is only no longer priced by around 1bps at most.


• While the data is hawkish vs market expectations the wage metrics printed cooler than the BoE was looking for. Which, in addition to known reliability issues and expectations for the labour market to cool as the year progresses and in turn bring down wage growth, has desks continuing to look for more easing then markets currently price, with ING believing the path of least resistance is for four total 2025 cuts; i.e. 75bps more vs current market pricing of 57bps.


• Action which weighed on Gilts to a 92.43 base, taking out Monday’s 92.48 low and bringing last week’s 92.31 low into view. Thereafter, the 30th January trough at 92.23 before the figure and then 92.96 from the prior session provide support.


• More recently, BoE’s Bailey has remarked that there is nothing in the latest jobs data which fundamentally changes their view, a remark which came alongside a robust UK auction and has lifted Gilts by just under 20 ticks from the mentioned low.

18 Feb 2025 - 10:20- Fixed IncomeEU Research- Source: Newsquawk