EUROPEAN FIXED UPDATE: Two way action for EGBs & Gilts but benchmarks ultimately firmer, aided by auctions. USTs more contained pre-FOMC

USTs: -5 ticks, 111-05

• Somewhat directionless in APAC trade as the read-across from the decent US 10yr sale was offset by reports of a US-China meeting this weekend and the latest bout of Chinese stimulus. Additionally, participants now look to the FOMC this evening.


• As the morning progresses and participants digest the trade updates and PBoC action, benchmarks have been coming under slightly more pressure with USTs at the bottom end of a relatively narrow 111-04 to 111-11+ band. Yields are just about firmer across the curve which as a whole is flatter this morning, in contrast to the steepening that was in play for much of yesterday.


• From the Fed, they are expected to keep rates steady and continue the wait-and-see approach as the board monitors how tariffs impact data in the weeks and months ahead. Markets imply just a 2% chance of a cut today, the first move is not fully priced until September (-43bps) though July is very close at -23.5bps; reminder, July had been priced until the robust April NFP report last Friday.


• The statement and Chair Powell will be scrutinised for any insight into the timing of the next move; following the stronger-than-expected April jobs report, Goldman Sachs and Barclays delayed their expected rate cuts to July from June, while Citi, who initially forecast a 25bps cut, now expects reductions to begin in June.

Bunds: +5 ticks, 130.97

• Initially firmer, but only modestly so and unable to make a foothold above the 131.00 handle. As such, Bunds are shy of Tuesday’s 131.08 best when Merz failed to become Chancellor in the first vote.


• To briefly recap, Merz became Chancellor yesterday on the second asking and while this does not technically affect the CDU/CSU-SPD coalitions power in the Bundestag, confidence in Merz will undoubtedly have been knocked. We still don’t know who opposed Merz in the first round, but there is speculation it could be from the CDU/CSU due to the sweeping fiscal measures Merz spearheaded before the new Bundestag took effect.


• As outlined in USTs, despite picking up in the first part of the European morning as newsflow focussed on India-Pakistan tensions and a handful of soft corporate updates from heavyweights such as Novo Nordisk, benchmarks have begun to wane and move into the red.


• Pressure that occurred as participants digest the favourable US-China trade updates, PBoC support, await supply and as European equity heavyweights open with modest gains despite indications pointing to notable downside (see equities).


• Bunds found themselves back towards their 130.79 base, support thereafter at 130.69 and 130.66 from Monday and Tuesday respectively. Today’s low hit alongside a spike in trading volume as Reuters reported that Germany’s Defence Minister Pistorius is seeking a drastic defence spending increase to over EUR 60bln/year from 2025.


• Supply via France was strong and sparked a jump of around 10 ticks in OATs taking them to a new 124.96 session high, a move that also reverberated into Bunds with the German benchmark trimming earlier downside by a handful of ticks and moving marginally into the green but within earlier confines.

Gilts: +19 ticks, 93.00

• Opened higher by a handful of ticks given the read across from peers at the time. However, the benchmark has since waned in-line with peers but with magnitudes slightly less pronounced; nonetheless, Gilts briefly took out Tuesday’s 92.82 base to a 92.79 low.


• Overnight, the main UK development was a FT report that a US trade pact featuring lower tariffs for cars and steel is set to be signed this week and will spare some UK exports from the full extent of the 25% additional US measures. However, a UK official cautioned that while progress is being made there is still disagreement over pharmaceuticals.


• Specifics for the UK this morning are a little light, no move to a better than expected Construction PMI for April while the DMO’s 2030 outing was well received and featured a b/c in excess of 3x, lifting Gilts back above 93.00 but stopped shy of the earlier 93.08 peak


• Domestically, Politico expects PM Starmer to come under scrutiny in PMQs for his concession on NI payments by some short-term Indian workers as part of the new India-UK trade deal.

07 May 2025 - 10:15- Fixed IncomeEU Research- Source: Newsquawk