EUROPEAN FIXED UPDATE: Moody start for bonds after the US downgrade, Gilts lag on Brexit updates and into 30yr syndication

USTs: -17 ticks, 109-26

• Moody’s on Friday cut the US by one notch, joining S&P (cut August 2011) and Fitch (cut in 2023, after covid), with an AA1 rating. A cut which sparked on Sunday a sell-US trade with stock futures, USD and USTs hit.


• The announcement by Moody’s came amid US House Republicans blocking the passage of the Republican tax/spending bill due to concern that it would lift the short-run deficit. A view reflected in the commentary by Moody’s, who wrote that the budget deficit will rise to 9% of GDP in 2035 from the current 6.4%, unless action is taken.


• On the move, Barclays wrote that they expect no substantial short-end moves as "legislation since the financial crisis has reduced the use of explicit ratings guidelines in investment mandates". Also, remarking that the cut is unlikely to have any implications in terms of USTs being used as collateral.


• Reflective of this, short-end US yields are contained/unchanged though the long-end is elevated and feeling the brunt of the morning’s action with 2s10s steeper by over 6bps and 2s30s by over 8bps; though, both within recent parameters.


• USTs themselves at the bottom of a 109-26 to 110-08 band, slipping from Friday’s 110-10+ close. While this morning’s action is notable, and it remains to be seen how US players will react later today, the base thus far is still the best part of 10 ticks clean of last week’s 109-18+ trough.


• Elsewhere, and possibly factoring into the morning’s action, the latest TIC data series according to SEB indicates that China is continuing to reduce its long-term US government securities holdings, moving into third place behind Japan and the UK. SEB adds that Europe is continuing to increase its holdings of US bonds.


• Ahead, the US session is dominated by Fed speak, featuring Bostic, Williams, Logan and Kashkari; note, of those Williams is the only official who votes in 2025. Also to bear in mind, the skew of officials speaking is on the hawkish side.

Bunds: -54 ticks, 129.88

• Handful of news updates for the bloc today, the main one of course being the EU-UK reset talks which appear to have gone well (see Gilts below for more). Elsewhere, political developments with the EU have been net-positive, but some uncertainties/risk points remain.


• Firstly, pro-EU candidate Dan won the presidential election runoff in Romania. Additionally, liberal Trzaskowski (supported by PM Tusk) is leading in round one of the Polish presidential election.


• However, in Poland this looks to be by a margin of just 1.5pps vs the 4-7pps seen in opinion polls, owing to the strength of far-right candidates, meaning that the June 1st run-off between Trzaskowski and Nawrocki (a Trump-friendly candidate who wants to maintain individuality within the EU) could go to the wire.


• Bunds currently find themselves at the bottom-end of the day’s range, weighed on by the readacross from USTs and as yields acknowledge the potential growth benefit of the EU-UK progress. Specifically, just off the low of a 129.88 to 130.41 band, downside that accelerated as Friday’s 130.11 trough was lost. Support next at 129.59 from May 12th.


• Finally, a handful of ECB speakers over the weekend but Wunsch is the one to highlight. He told the FT that the ECB may have to cut interest rates below 2%, as recent shocks could justify a “mildly supportive” monetary policy. Of note as while he hasn’t spoken much recently, Wunsch is typically on the hawkish side of the ECB.

Gilts: -70 ticks, 91.04

• The main development this morning was indications and since confirmation that there was a late-doors breakthrough on EU-UK reset talks, and an update is expected mid-morning once political sign off is attained.


• The formal schedule ahead has European officials arriving in London by around 11:00BST before a press conference featuring UK PM Starmer and EU Commission President von der Leyen, currently set for 12:30BST.


• As we countdown to that press conference, Gilts are pressured by 70 ticks at a 91.04 trough. Pressure comes as the benchmark began the day 40 ticks lower, in-fitting with USTs as discussed, before falling further as participants digest the Brexit progress.


• For Gilts, the positive news on the trade front has added to the UST-related pressure, evidenced by Gilts being the clear underperformer this morning. Price action which lifts UK yields and while they are comfortably in recent ranges, the bias will be unwelcome by Chancellor Reeves despite the very welcome growth implications she will hopefully be able to outline.


• Another source of pressure, and likely factoring in the underperformance, is the DMO being in the market today with 30yr syndication.

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