EUROPEAN FIXED UPDATE: Knocked by the risk tone and reports of EU issuance, OATs outperform as post-Moody's

OATs: +9 ticks, 122.53

• On Friday, France narrowly avoided losing its final AA rating. Moody’s kept France at Aa3, but cut the outlook to negative (prev. stable). Commentary in the review was similar to the last assessment, but also highlighted the fresh concern around the postponement of pension reform until the next presidential cycle.


• The focus for the week is the continued passage of the budget motions. Due to a scheduling change, the discussion around a wealth/high-net-worth tax has been pushed to Tuesday. As a reminder, Socialist Party’s (PS) Faure made clear last week and again this weekend that if there isn’t compromise on such a measure, they will remove their support for the Lecornu government; a removal that would all but certainly lead to the government falling.


• PS has proposed a lighter version of the Zucman tax. One that contained a 3% minimum tax on assets over EUR 10mln (excludes certain business groups that otherwise would have been taxed) vs the 2% on assets over EUR 100mln in the Zucman tax. As it stands, some of the bloc and much of the opposition, on both the Left and Right of the spectrum, are sceptical of the lighter proposal.


• Amidst all this, OATs trade a little better than their German peer, benefitting from Moody’s and an extra day of talks on wealth tax adjustments. As such, the OAT-Bund 10yr yield spread is a little narrower down to just below the 80bps mark after climbing incrementally over it last week.

Bunds: U/C, 129.46

• Digesting reports around potential Ukraine-related joint issuance. Politico reports that EU nations could be called upon to raise 10s of billions of Euros of joint debt to support Ukraine. A backup plan following the use of frozen Russian assets being blocked by Belgium due to legal concerns.


• Fresh debt would add to an already indebted EZ with issuance out of the likes of France and Germany significant already YTD and the debt situation of particular note. However, the diplomats cited by Politico suggest that the use of frozen Russian assets remains the best option.


• Ifo came in stronger than expected for business climate and expectations while the current conditions figure missed and unexpectedly declined from the prior. No reaction to the series. Within the release, the think tank outlined that expectations are increasing for all sectors and the domestic economy has not lost hope for a recovery; commentary that is in-fitting with the PMI commentary around services though the PMI assessment on manufacturing, while improved, was still downbeat.


• Bunds in the red throughout the early morning, down to a 129.26 trough with losses of 20 ticks at most, hit by the risk tone following the trade progress (see USTs) and also potentially weighed on by talk of joint issuance. Since, as the risk tone deteriorates from best, benchmarks generally have climbed off worst and for Bunds this has been sufficient to bring them to highs of 129.45 and near the unchanged mark. Even if the benchmark moves into the green, there is some way to go before the best levels from last week’s sessions are tested, between 130.02 and 130.38.


• For the week, we look to the ECB on Thursday, expected to maintain policy conditions, alongside preliminary Germany HICP before the EZ figure on Friday.

USTs: -4+ ticks, 113-09

• Counting down to the FOMC. There was nothing in Friday’s CPI release to change the narrative of a cut being the base case on Wednesday, markets currently implying 24.2bps worth of easing this week and 48.5bps by end-2025..


• As alluded to elsewhere, trade updates have been driving much of this morning’s action and, initially at least, weighing on havens. In brief, the US and China have come to a framework for Thursday’s leader-level talks, a US tariff increase on China has been averted which, in-turn, resulted in a one year delay to China’s new rare earth licensing regime being agreed.


• Updates that sent USTs to a 113-04 base, taking out last week’s 113-09 trough. Since, as the risk tone eases marginally from best, the complex has lifted off lows taking USTs to a 113-09 high, but still very much in the red.


• For today, the docket is light and the discussed trade points are likely to remain in focus into/after a frontloaded supply slate on account of the Fed with USD 139bln due across 2yr and 5yr notes.


• Elsewhere, the PBoC has announced that they will be resuming bond activity in the open market. As a reminder, the PBoC suspended such activity at the start of 2025 after beginning it in 2024 as a policy tool for liquidity management purposes. A resumption that comes after growing speculation over the last few weeks that the PBoC could recommence such activity, potentially in Q4-2025.

Gilts: -8 ticks, 93.36

• Opened lower by 22 ticks before falling a little further to a 92.15 low, acknowledging the pressure seen in peers given the trade tone. Since, the benchmark has lifted off that low and holds around the 93.30 mark, just off a 93.36 peak. If the move continues and Gilts manage to get into the green then resistance lies at 93.60, 93.80 and 93.93 from last week.


• For the UK, specifics a little light after last week’s packaged data agenda. As such, the benchmark is following the direction set out by USTs/EGBs thus far.


• Weekend press reports remain focussed on the approaching budget. The Times outlined that Chancellor Reeves is set to increase the National & Real Living Wages, adjustments that have unsurprisingly drawn critique from some. Elsewhere, Bloomberg reported that the UK is considering shortening the timeline for IPOs, in order to spur interest in the London market.

27 Oct 2025 - 09:55- ForexData- Source: Newsquawk