EUROPEAN FIXED UPDATE: JGBs briefly hit by a poor auction, fixed recovery continues into speakers

JGBs: +12 ticks, 139.27

• Initially firmer, in-fitting with peers after Monday’s eventual intraday recovery from Moody’s-driven pressure. However, upside in Japan was limited into supply.


• A 20yr auction that went poorly. Despite a higher average yield on the tap the b/c slipped to 2.5x (prev. 2.96x), the weakest cover since 2012. Furthermore, the outing tailed by over a bps. The results of this sparked immediate pressure in JGBs, slipping from just above 134.40 to a 138.78 base.


• Thereafter, the benchmark gradually made its way off lows and lifted marginally back into the green on the day. However, it still remains some 15 ticks shy of pre-auction levels.

USTs: +6 ticks, 110-10+

• Experienced a slight bearish blip on the above auction. However, Monday’s intraday recovery remained intact for USTs overnight and the benchmark has since extended to a 110-14+ high, eyeing 110-21+ from last week as the next point of resistance.


• Focus firmly on the US fiscal situation, the next scheduled update is 06:00BST/01:00ET on Wednesday when the House Rules Panel will debate the bill before it is (theoretically) put to the House on Thursday. As a reminder, Speaker Johnson has indicated he wants to get it done by Monday from a House perspective. Even if this is attained, the bill then faces the Senate.


• Progress on the bill presents an ongoing bearish catalyst for USTs, as the spending cuts within it are not tantamount to any significant reduction in the deficit. On this, ING highlights that one welcome point for USTs is that extending existing cuts, won’t directly add to issuance as the decision is already accounted for.


• Back to Moody’s action on Friday, the downgrade has reportedly sparked some concern in Hong Kong that pension managers could be forced to sell some UST holdings, via Bloomberg citing sources. This is due to a rule that they can only have more than 10% of the fund in USTs if the US is AAA rated.


• However, Japan R&I still ascribes such a rating, outlook Stable, to the US and is not considering an immediate downgrade. Writing that they "don't believe the situation described there has significantly changed".


• Ahead, the docket is once again dominated by Fed speak and among them are 2025/permanent voters Collins, Musalem and Kugler; Collins is not speaking on Monetary policy, the latter two are expected to provide a text.

Bunds: +10 ticks, 130.64

• Early doors remarks from Schnabel this morning, though nothing that has fundamentally changed the narrative. Numerous speakers ahead incl. Cipollone, Knot & Nagel. Similarly, no move to German Producer Prices printing lower than expectations and the prior, driven primarily by energy prices for both Y/Y & M/M components.


• Continues to rebound from Monday’s pressure, at best has been 15 ticks above that session’s 130.60 peak though is currently holding between the two marks. If the move continues, resistance features at 130.86 from May 9th before the figure and numerous recent levels between 131.08 and 131.65.


• Dual-tranche Green outing due, should pass without issue. Thereafter, ex-speakers, the European docket features flash Consumer Confidence for May, expected to show a slight pickup from the prior but still remain well into negative territory.

Gilts: +27 ticks, 91.78

• Firmer and currently outperforming. Outperformance which comes as Gilts didn’t get as much time to benefit from Monday’s late-door rebound and as the UK benchmark was that session’s underperformer, given EU-UK updates.


• As it stands, at the upper-end of a 91.45-91.91 band. Upside occurred as the benchmark began the day at 91.50, swiftly eclipsing Monday’s 91.57 best before climbing further to the above peak. Resistance seen at 92.03 from the 16th and then 92.53 from the 9th.


• BoE’s Pill outlined that his vote in May to leave rates unchanged was a “skip”. In fitting with his preference for “cautious and gradual” cuts and stemmed from a view that the recent quarterly pace “is too rapid given the balance of risks to price stability”. No move in Gilts to his speech.


• Reading between the lines, the speech indicates that he will likely return to voting for easing in August (skipping June, as the majority will likely vote for), but it remains to be seen if he will vote for another skip down the line.


• PM Starmer will present the EU-UK reset framework in the House of Commons this afternoon, expect lots of headlines but as the details were heavily run on Monday we shouldn’t get much in the way of market-relevant updates.

20 May 2025 - 09:55- Fixed IncomeEU Research- Source: Newsquawk