EUROPEAN FIXED UPDATE: Modest UST & Bund divergence while Gilts lag and hit lows on BoE's Greene

USTs: -5 ticks, 110-20

• Still digesting the remarks from Trump on Fed Chair Powell and interest rates. Commentary which sparked marked steepening on Monday as short-end yields were weighed on by the prospect of cuts while the long-end picked up on the prospect of this sparking more inflation down the line.


• As it stands, the curve is unwinding that action a little and is slightly flatter today but still in close proximity to the steepest points seen on Monday i.e. 2s10s around 63bps vs Monday’s 55-66bps range.


• USTs softer on the session, at the low-end of a 110-18 to 110-27+ band, drifting gradually throughout the late-APAC/European morning as the broader risk tone inched higher stateside, but with action capped by the weak European tone. The move took out Monday’s 110-22 base and now looks to support at 110-15 from last Wednesday before a gap to that week’s 109-13 base.


• 2yr tap ahead, before 5yr & 7yr sales later in the week, all pertinent given the above and serve as an indicator into Treasury market functioning. As a reminder, the last 3s, 10s, 30s cycle began on the softer side given bond market concern at the start of that auction week.


• Further insight into market functioning, and also the POTUS comments on Powell, may arise from the hefty Fed docket with Jefferson (text), Harker (no text/Q&A), Kashkari (Q&A), Barking (Q&A) and Kugler (text, Q&A) all scheduled. We have already seen WSJ’s Timiraos surmise it as Trump essentially setting Powell up as the fall-guy if there is an economic deterioration.


• For reference, markets currently imply 3bps of easing in May with a cut not fully priced until July (42bps) and just over 90bps implied by end-2025. In terms of replacement Fed Chairs, Polymarket has Kevin Warsh who served on the Fed between 2006-2011 as the frontrunner.

Bunds: +6 ticks, 131.77

• Modest two-way action with catalysts light thus far. No reaction to the latest ECB SPF that featured an increase to the inflation and cut to the growth views of respondents; a point which may well be reflected in the IMF forecasts this afternoon.


• Holding at the top-end of a 131.46-83 band on return from the long weekend and while Bunds are outperforming USTs, it is only modest with the German benchmark essentially unchanged. In contrast to Bund outperformance that has been seen in periods where the holding of USTs has been called into question; a narrative which could arguably be justified by the Trump comments on the Fed/Powell.


• Schatz sale due shortly and should go well given the strong history for the line. However, the coupon has been cut from the prior and the tap enters a somewhat tricky market given the above considerations and competing US supply later on today.


• Ahead, ECB’s Lagarde due on CNBC around 15:00BST. President Lagarde may be questioned on her views on ECB sources from just after Thursday’s meeting, a Reuters piece that outlined some governors see a high chance of a June cut though some are far from deciding. Into Lagarde, markets imply around a 75% chance of a June cut.

Gilts: -40 ticks, 92.03

• Opened lower by just under 30 ticks before paring essentially all of the move to print a 92.40 high, just five ticks shy of Friday’s close. However, this proved short lived with the benchmark coming under gradual but notable pressure and entered the appearance from BoE’s Greene at a 92.02 base.


• Greene highlighted two-way risks to inflation being present though some modest pressure in Gilts, to a 91.96 trough, came as she highlighted wage growth remains “pretty high” and she is keeping an eye on the rise in inflation expectations. On the flip side, she noted that US tariffs are more of a disinflationary risk to the UK than an inflationary one; a comment that lifted Gilts bank above 92.00.


• Overall, Greene’s remarks emphasised the significant uncertainty the BoE, and policymakers generally currently face. For reference, market pricing has a May cut entirely priced with around 87bps of total easing seen by end-2025. Pricing didn’t substantially change during the speech.


• Chancellor Reeves is to head to Washington this evening for the IMF summit (forecasts today at 14:00BST), Treasury is expected to provide further details of her trip later today from which we look for confirmation that she will be meeting with US Treasury Secretary Bessent.


• Elsewhere, the Times reports that PM Starmer is nearing a UK-EU defence deal, to get the EU on board the UK is reportedly to soften its view on some French fishing demands.

22 Apr 2025 - 10:00- Fixed IncomeEU Research- Source: Newsquawk