EUROPEAN FIXED UPDATE: Off best but holding marginally in the green into US PPI

USTs: +5+ ticks, 107-13

• Firmer, in slight respite from recent sessions of pressure, but off best with upside for core benchmarks capped by the broadly constructive risk tone.


• The primary overnight update was reports that President-elect Trump’s team is discussing a gradual tariff approach that could be done on a month-by-month basis, a Bloomberg report which helped to lift the risk tone and provide yields with some respite on the less-inflationary implications of such an approach vs. tariffs being implemented at elevated levels in one move.


• As it stands, USTs find themselves in the green but at the lower-end of a 107-11 to 107-18+ band with yields softened across the curve and the belly leading thus far, as such there is no overt flattening/steepening bias in play.


• The docket ahead, aside from any updates from Trump on the tariff sources (reminder, he has pushed back on other reports in recent sessions), is headlined by PPI ahead of Wednesday’s CPI release. For PPI, the headline M/M is seen coming in slightly cooler than the prior while the core figure is seen a touch hotter.


• Post-PPI, Fed’s Schmid and Williams will be scrutinised for any pre-CPI insight, commentary which is intersected by the Discount Rate Minutes for December.

OATs: +6 ticks, 121.03

• French PM Bayrou will present a government statement in the National Assembly from 14:00GMT and then a debate will follow. The statement is billed as a “general policy statement” but is expected to be heavily focussed on the economy.


• Bayrou’s speech is expected to be somewhat vague as extensive negotiations still need to take place on fiscal reform in order to bring the budget deficit down; the main point of focus for today is pension reform, with the Socialist Party (PS) indicating it won’t support Bayrou unless there is a commitment to suspension and renegotiation.


• As of Monday-night, it did not appear as if there would be suspension on implementing the reform; however, this morning, the PS leader said they could be near an agreement. While the support of PS will be welcome, it is unlikely that Bayrou will be able to secure support from La France Insoumise (LFI) who have pledged to put forward a censure motion (i.e. no confidence motion) against Bayrou.


• While not ideal, unless National Rally (RN) supports the motion then Bayrou’s government is unlikely to fall this week; RN have been particularly quiet in recent days, largely as Bayrou has omitted them from any talks as his focus has been on the left (i.e. NFP).


• Into the speech, OATs are trading slightly better than Bunds having picked up on the above commentary from the PS leader to a 121.29 session high. Amidst this, the OAT-Bund 10yr yield spread has narrowed by a handful of bps from wides of ~87bps this morning.

Bunds: -5 ticks, 130.76

• Essentially flat, have been trading directionally in-fitting with USTs but perhaps losing out to France on domestic updates and Italy on the risk tone, with BTPs the current EGB outperformer and at highs of 117.80 with upside of c. 20 ticks on the session.


• Bunds themselves are at the lower-end of a 130.75-131.09 band. Perhaps weighed on by remarks from ECB’s Holzmann, which had a hawkish-tilt, though his commentary was in-fitting with his known bias. For reference, no reaction at the time to a slide deck from Chief Economist Lane who is also scheduled for 11:00GMT.


• For Bunds, if the high is surpassed then resistance comes into play at 131.30 while to the downside support lies at 130.57.

Gilts: +9 ticks, 89.38

• Firmer, but at the lower-end of a 89.36-89.72 band. Specifics for the UK thus far have been relatively light and we are firstly awaiting a I/L auction due shortly to see if there are any demand-concerns.


• Thereafter, and more pertinently, a speech from Chancellor Reeves is expected this afternoon in the House of Commons (timing TBC, likely around 12:00GMT), commentary which will be carefully scrutinised for any fresh details on Reeves lines of sticking to the fiscal rules and not increasing taxes to shore up headroom.


• Amidst this, the UK 10yr yield is towards 4.87% highs for the session, elevated but still shy of the 4.925% mark hit last Thursday. As a reminder, the Gilt contract low resides at 88.96.

14 Jan 2025 - 09:55- Fixed IncomeData- Source: Newsquawk