EUROPEAN FIXED UPDATE: JGBs react to the election, bonds elsewhere have a bearish bias, Gilts lag

JGBs: +18 ticks, 138.49

• Climbed higher overnight in reaction to Sunday’s Japanese Upper House election. At best, posted gains of 40 ticks to a 138.71 peak but ended the Japanese day off highs though still markedly clear of the 138.31 open.


• Amidst this, the Japanese 10yr yield is under pressure and continuing the pullback seen in the last few sessions after the 10yr peaked at 1.6%, the highest since 2008, in the week before the election. At most, the 10yr yield has been lower by around 4bps. In contrast, longer dated yields have picked up marginally with the curve slightly steeper overall.


• A slight steepening of the yield curve that has been spurred by expected pressure from opposition parties on the LDP-led coalition to provide them with concessions such as cash payouts in order to secure the three extra votes Ishiba needs to hold an Upper House majority.


• Elsewhere, we await comment from the BoJ on the election, though until we know what concessions Ishiba is willing to make the BoJ is unlikely to provide significant insight. Bloomberg sources report that the BoJ sees little impact from the election on rates, but sees a risk of upward prices if there is significant fiscal loosening; a view echoed by markets amid the steeper yield environment.

USTs: -4 ticks, 111-02

• In the red, but only marginally. In a thin 111-01+ to 111-06+ band as fresh catalysts are light and the US docket, ex-earnings, is limited on account of the Fed blackout. Note, a handful of Fed speakers due today incl. Chair Powell; however, remarks are not expected to be pertinent to monetary policy.


• That aside, the Richmond Fed index is due and follows on from the Philadelphia Fed printing much better than expected on the headline last week, a strong employment figure but with a marked jump in prices paid.


• Elsewhere, trade of course remains at the forefront of newsflow. The main update has been White House Press Secretary Leavitt saying more tariff letters could be seen for August 1st. Separately, a few updates from Canada and Japan which have been positive overall but no signs of a breakthrough yet. Finally, further reports this morning (latest via Reuters sources) suggest a mini deal with India is unlikely before August 1st, but work continues towards a broad agreement in September/October.


• If the current marginal pressure extends, Friday’s low resides at 110-21+, that week’s low at 110-10+ and the current WTD base at 110-08. Note, the US yield curve is, like Japan’s, marginally steeper; however, yields are firmer across the board stateside vs the mixed performance in Japan where short-end yields were lower, as outlined above

Bunds: -17 ticks, 130.27

• In-fitting with USTs. Softer in a 130.24 to 130.49 band. Specifics this morning have been light with no pertinent EU trade updates, data or speakers thus far; as is the case for the Fed, the ECB is currently in its quiet period so while President Lagarde is scheduled today, she is not expected to provide any pertinent commentary.


• No reaction to this morning’s ECB Bank Lending Survey, where credit standards were broadly unchanged for firm loans in Q2, tightened slightly for households but more markedly for consumer credit. Finally, it showed that housing loan demand continues to increase strongly.


• If the morning’s bearish bias extends, then the July 7th low stands at 130.02 before the figure and then numerous levels from the last two weeks between 129.73 and 129.02.


• Ahead, supply due from Germany with two green lines due. Generally, such outings pass without incident, though the last tap of today’s 2035 line experienced very weak demand in April and weighed on Bunds by around 10 ticks at the time.

Gilts: -28 ticks, 91.50

• Underperforming a touch, began the morning lower by 12 ticks in-fitting with the above modest bearish bias before slipping another 20 to a 91.46 base. While in the red by just over 30 ticks at worst, the benchmark remains clear of Monday’s 91.29 low and last week’s 91.08 trough.


• This morning’s underperformance is seemingly a function of the latest PSNB data. A series that showed borrowing in June was above market consensus and the second-highest June figure since records began; highest was in 2020, during COVID. A series that provides no relief for the Chancellor’s fiscal position and keeps the narrative for the Autumn Budget firmly towards tax increases.


• However, it is worth highlighting that while the borrowing amount was above market forecasts, the provisional estimate for Q2 is in-line with the OBR’s forecast from the Spring Statement. So, in short, while the latest data provides no relief for the Chancellor it does not make her position any worse at this stage; as it stands, Pantheon Macro estimates that Reeves currently faces a GBP 13bln fiscal hole.

22 Jul 2025 - 09:55- ForexEU Research- Source: Newsquawk