EUROPEAN FIXED UPDATE: Two-way action in Bunds as Merz secures the Chancellery but a blocking minority exists, Gilts await BoE speak

Bunds: -6 ticks, 132.32

• Opened lower by a handful of ticks after the initial election results, see the 07:35GMT analysis piece for full details, before falling further to a 132.02 low on confirmation that CDU/CSU is the largest party and that both FDP and BSW will not meet the 5% threshold to enter the Bundestag.


• As CDU/CSU hold just 208/630 seats, CDU’s Merz will need to form a coalition to command a majority government with the base-case being a Grand coalition with the SPD, though this only provides a slim majority; while CSU has been heavily against a Kenya coalition (Grand + Greens) this does remain a slim possibility. As a reminder, a Kenya coalition is regarded as the most bearish outcome for Bunds as both SPD and Greens support debt brake reform.


• However, as the full results were released (though likely subject to a recount given BSW coming in just below the 5% threshold) a bounce was seen in Bunds, taking them from the above low to a 132.50 peak and briefly back into the green on the session. A bullish move likely driven by the presence of a blocking minority in the Bundestag.


• A blocking minority exists as AfD and Die Linke together command over ⅓ of the seats in the Bundestag, which means that they could block government measures on constitutional reform which pertinently means that they can block debt brake reform.


• AfD is against any reform of the debt brake. However, Die Linke is more open to it contingent on it not being used for defence spending, as such Merz may be able to pass some adjustments though not to the extent SPD or markets would have perhaps wanted. Alternatively, Merz could progress further down the joint EU borrowing route and/or use the escape clause to bypass the debt break for the current fiscal period; however, this runs the risk of being subsequently overturned by the Constitutional Court.


• Ahead, we look to see how quickly Merz can form a coalition and what compromise(s) he makes with SPD to secure their support. Merz has said he would like a functioning government by Easter, though whether that is possible remains to be seen.


• Note, the February Ifo came in somewhat mixed against consensus with Climate and Current Conditions missing while Expectations beat, however, the data is caveated by the survey period occurring before the weekend’s elections; no reaction to the release, Bunds holding around the mid-point of today's range.

USTs: -3+ ticks, 109-19

• A slightly quieter overnight session owing to the absence of cash trade as Japan was on holiday. Broadly speaking, USTs have been following their German counterpart but with magnitudes more contained and the early-morning bounce not occurring to quite the same degree with USTs remaining just in the red at all times.


• The docket ahead is headlined by USD 69bln of 2yr supply, potential remarks from Fed’s Barr (voter) and the January National Activity Index.


• Aside from those points, we await further updates from/around US President Trump after he spoke with China’s President Xi on Friday on Fentanyl. Though, it was also reported that Trump is said to be pushing Mexico towards implementing tariffs on Chinese imports.


• Currently, USTs are in the red in a narrow 109-16 to 109-21 band. Parameters which are entirely within Friday’s 109-03+ to 109-24 range.

Gilts: +8 ticks, 92.49

• Directionally in-fitting with Bunds though, as with USTs, magnitudes are a little more contained but with Gilts managing to hold in the green for much of the morning.


• Gapped higher by 18 ticks from Friday’s 92.41 close, as the mentioned bounce in Bunds had already occurred by the time Gilts commenced trade, and then extended to a 92.66 peak. However, Gilts then quickly dipped to a 92.39 base which leaves the figure and then 91.91-94 from last week as support.


• Since, the benchmark has reverted back towards opening levels as we await commentary from the numerous BoE speakers at today’s conference on “The Future of the Central Bank Balance Sheet”. Pill, Ramsden, Lombardelli and Dhingra all scheduled at different points today.


• From this, we look for any insight into recent data points after Bailey remarked that December’s GDP and recent jobs metrics haven’t fundamentally changed their outlook; note, no official has directly commented on the January CPI (noisy, ultimately hotter), January Retail Sales (strong) and February Flash PMIs (point to stagflation).


• Additionally, for their views on the February statement’s change to a "gradual and careful" approach to rate reductions. For reference, market pricing has 54bps of additional 2025 easing implied.

24 Feb 2025 - 09:55- ForexData- Source: Newsquawk