EUROPEAN FIXED UPDATE: Political and fiscal turmoil drives yields higher, no move to HICP, USTs await ISM

JGBs +8 ticks, 137.32

• Opened higher by a couple of ticks before treading water into supply, an outing that was strong with a b/c near 4x. This lifted JGBs by over 20 ticks to a 137.62 peak for the session, with gains of just under 40 ticks at most.


• However, much of this then pared and JGBs have since reverted back to pre-auction levels of c. 137.40.


• Pre- and post-supply BoJ’s Himino has been on the wires and adding to the bullish bias. While the official still expects further rate hikes, he provided no specific time frame for the next move and highlighted that the BoJ should be prepared for the possibility that Trump’s tariffs have a bigger-than-expected negative impact on the Japanese economy.


• Since, though not spurring any significant JGB action thus far but potentially driving some of the post-supply pullback, LDP members Moriyama and Onodera reportedly intend to resign. Resignations seemingly framed as the LDP taking responsibility for the recent Upper House defeat, and adds pressure on PM Ishiba to resign.


• Note, while the fresh political uncertainty could bias Japanese yields higher, it also presents an opposing force, particularly at the short-end as the uncertainty could stand in the way of the BoJ continuing its normalisation process.

Gilts: -31 ticks, 89.91

• Gilts opened in the red by a handful of ticks but have since slumped to downside of 40 ticks at worst in 90.16-89.82 confines. A bout of pressure that has been reflected across the broader fixed income space with significant moves seen across assets as well (USD bid, Equities hit).


• The move appeared to begin with UK assets, despite a lack of fresh newsflow at the time. Action has propelled the 30yr yield to yet another multi-year high, at 5.69%, and taken the 10yr yield to 4.806% and approaching the zone which, at the time of the Spring Statement, was seen as sufficient to erode Reeves headroom via heightened funding costs.


• Focus remains on the reset undertaken by PM Starmer on Monday, this primarily involved moving key Treasury official Jones to No. 10. A move that has been interpreted in various ways as either Starmer having greater oversight of the Treasury, via The Telegraph among others.


• Or, as a “reverse takeover” of No. 10 by Chancellor Reeves, Times’ Magurie writes. Either way, a broader reshuffle of junior ministers is still expected to occur in the next week or so.


• While there hasn’t been any fresh shifting of positions this morning, the reset undertaken on Monday and scrutiny of it this morning places further pressure on the already weak UK fiscal situation into the Autumn Budget and appears to be driving action; as a reminder, Reeves is expected to have to increase taxes in order to plug the fiscal gap and restore some headroom.


• On this, Jefferies’ Kumar writes “Tax rises are inevitable but we are reaching a stage where further tax rises could become counterproductive”.

Bunds: -29 ticks, 128.89

• Ahead of the morning’s EZ HICP data, ING wrote that with inflation prints coming in softer the front end of the curve could end up moving lower. With the question being how the long-end reacts, with German fiscal impulses likely to filter through next year alongside the current robust growth narrative biasing the desk to further near-term steepening. A point that gains further traction by the potential steepening impact of upcoming Dutch pension reform.


• Though, a potential caveat to ING’s view of lower short term yields is the hawkish contingent at the ECB. Outlined by the influential Schnabel this morning who, pre-data, said rates are already mildly accommodative and she does not see a reason for a further cut. Adding that global hikes could occur sooner than people think. On the flip side, Simkus speaking to Econostream hinted at a December cut.


• Flash HICP came in hotter-than-expected for the headline and super-core Y/Y metrics while the core printed as forecast and the services figure moderated from the prior. No reaction to ECB pricing, implies just 6bps of further easing this year.


• Bunds saw some modest two-way action on the series, but were ultimately left just off lows in a 128.77 to 129.24 band for the day. Note, Bunds entered the inflation window lower by around 30 ticks, given the action discussed in Gilts.


• Attention on the European Parliament where the EU-US trade agreement is facing pressure from the S&D group, leader Perez spoke to Politico and said they “firmly oppose the agreement”. Opposition from the S&D is notable as without their support, Commission President von der Leyen would need to court parties on the right-wing to get a simple majority.


• France remains in focus as we continue to count down to Monday’s confidence vote. Major updates a little light since Sunday’s media rounds from PM Bayrou, though National Rally (RN) has reportedly begun preparing for the possibility of the vote sparking a snap election, according to Les Echos.


• OAT-Bund 10yr yield spread is wider today, but thus far remains around the 80bps mark, in-fitting with action over the last few days. Shy of the 82.19bps peak from last week and the YTD peak at 88bps, and then last year’s 90bps peak.


• Ahead, supply due with Germany selling EUR 4.5bln of its 2027 Schatz, an outing that is followed by a EUR 5bln Bund tap on Wednesday.

USTs: -10 ticks, 112-06

• Overnight focus was on trade and Fed commentary from US officials. Firstly, Treasury Secretary Bessent said they are confident the Supreme Court will uphold Trump’s tariffs and highlighted that there are other ways of justifying tariffs. On the Fed, Bessent said we haven’t seen anything yet’ regarding the market reaction to President Trump’s pressure on the Fed, and believes there is a good chance Miran is in place before the September FOMC.


• USTs lower by 11 ticks at most, holding just off lows in a 112-05 to 112-16 band. Focus for the day is on any further trade updates, developments on Fed’s Cook (court document submission deadline) and ISM Manufacturing.


• Analysts expect the headline will rise to 49.0 from 48.0, while the prices paid metric is expected to rise to 65.3 from 64.8. As a basis of comparison, the flash S&P Global US manufacturing PMI rose to 53.3 in August from Julyʼs 49.8, marking a 39-month high and signalling a renewed improvement in factory conditions.


• More broadly, the week is one of anticipation into Friday’s NFP data to see if the markets recent dovishness with 22bps implied for September is correct or primed for a hawkish unwind in the scenario that the August series, and/or July revision, is strong.

02 Sep 2025 - 10:20- ForexEU Research- Source: Newsquawk