EUROPEAN FIXED UPDATE: Pulling back from Friday's Trump-induced jump, OATs lag ahead of Lecornu

USTs: -6 ticks, 112-30

• A softer start to the week after the Trump-induced jump on Friday. To recap, USTs got to a 113-09 peak on Friday after escalating trade tensions between the US and China.


• Since, the US President has been a little softer in his language over the weekend and while China has commented, it has not announced a tit-for-tat or escalatory response just yet. Points that have taken some of the tension out of the situation allowing the risk tone to recover to a degree.


• As such, USTs are down to a 112-30 trough with losses of 6+ ticks at most, though markedly clear of the 112-16+ base from Friday.


• Much of today’s focus is on the geopolitical situation in the Middle East, as Hamas has now released all 20 of the hostages it held.


• For the US today is a quieter than usual day owing to Columbus Day, while it is not a formal market holiday cash trade remains closed and was also shut overnight due to the absence of Japan. Nonetheless, Fed’s Paulson (2026) is scheduled and expected to provide a text and partake in a Q&A; we haven’t really heard from Paulson since she replaced Harker at the Philadelphia Fed at end-June.

OATs: -17 ticks, 121.96

• In focus as re-appointed PM Lecornu addresses his newly formed cabinet before speaking to parliament at some point today. As a reminder, the current schedule means that a draft 2026 budget of some form needs to be presented today in order to allow discussion/negotiation and passage before year end.


• The new cabinet has drawn criticism from the extreme left and right, with LFI and RN both moving to censure the government in today’s session; currently unclear when the motion will be heard. More pertinently, the Socialist Party (PS) expressed some concern at a few cabinet appointments, but nothing groundbreaking. Furthermore, and the point to watch, are the conditions of dropping Article 49.3 (Lecornu has already indicated he would do so) and rowing back on planned pension reform.


• Amidst this, OATs underperform their German peer with downside of 31 ticks at most vs 18 in Bunds. As such, the OAT-Bund 10yr yield spread has been a little wider today up to a 84.4bps peak; but shy of the 88.2bps YTD high from last week.


• The next points to watch are: Lecornu’s pension stance, how PS’ Faure responds to it and the general reception to the 2026 draft plan. The above points should determine the near-term trajectory of the latest government and by extension, the likelihood of fiscal reform actually taking place vs fresh legislative elections being called.

Bunds: -4 ticks, 129.28

• Softer, in-fitting with USTs.


• Specifics for Germany are primarily on the fiscal front. Handelsblatt reports that the Finance Ministry is considering exempting from the debt brake the interest payments on loans for defence spending. An exemption that would provide a “double-digit billion amount” of leeway in the coming years. No discernible move in Bunds to the release.


• Bunds in a 129.13 to 129.34 band which is entirely within Friday’s 128.70 to 129.41 parameter.

Gilts: -2 ticks, 91.14

• Opened lower by a handful of ticks, directionally in-fitting with peers but with magnitudes a little more contained. Since, the benchmark has been as low as 91.01, posting losses of 15 ticks at most. However, Gilts have reverted back towards opening levels of 91.12 in a 91.01-26 band.


• Alongside digesting the latest tariff updates and moves in peers, Gilts also have to contend with a significant number of domestic fiscal updates.


• In brief, multiple outlets report that the Chancellor is looking at giving herself more than the GBP 9.9bln of headroom she had from her first budget. To do this, she is said to be considering a pension raid, among other measures to target wealthier households, according to the Express/Telegraph.


• The desire for larger headroom is welcomed by markets, and likely explains the relative outperformance of Gilts vs EGBs this morning. Though the OBR’s scoring of the measures and any potential hit to spending and by extension growth of the tax(es) could have will be scrutinised and could ultimately weigh on the benchmark.

13 Oct 2025 - 09:55- ForexEU Research- Source: Newsquawk