EUROPEAN FIXED UPDATE: Periphery pressured amid ‘fragmentation’ fallout, USTs steady pre-CPI

Analysis details (10:51)

The periphery continues to capture the attention of participants after the ECB was relatively mute on a touted fragmentation tool and as such BTP-Bund yield spreads widen further. Albeit, the repeated guidance and limited presser elaboration was seemingly sufficient to prevent a true breakout in spreads, as the widest printed thus far is 234bp vs 300bp status in 2020; however, as has been mentioned previously, given how elevated yields broadly are at the moment, the current tolerance level for spreads is likely to be lower. Perhaps helping to stem any further widening is action in core counterparts, which are modestly firmer on the session and lifted, for instance, amid interesting commentary from outspoken hawk Holzmann – who said that while September will be at least 25bp, it could be between 25 and 50bp; a remark which is perhaps, incrementally, ‘dovish’ compared to his prior guidance. Currently, Bunds are holding at the upper-end of the sessions range, 148.10 vs 148.39 at best, with pertinent non-ECB related newsflow fairly limited and as the complex, alongside broader markets, are cognisant of and waiting for the upcoming US May CPI print. In light of this, USTs are essentially unchanged and reside within a circa. 10 tick range while the curve experiences very modest flattening, in-fitting with EGBs, and following yesterday’s well-received 30yr outing. Finally, Gilts are tracking their aforementioned peers with ranges equally as uninspiring as USTs. Nothing notable on the docket from a UK perspective for the session and as such focus pivots to next week’s BoE and for any fresh guidance on how far the tightening cycle is expected to run, as markets continue to price seven further increases (i.e. +175bps) before year-end.

10 Jun 2022 - 10:50- Fixed IncomeData- Source: Newsquawk