EUROPEAN FIXED UPDATE: Underpressure but only modestly so, awaiting central bank speak

USTs: -2 ticks, 111-12+

• Focus on the Iran-Israel situation. Benchmarks fell late US hours on Monday as the Iranian response and attack on US sites was judged to be symbolic, marking a deescalation in tensions.


• This removed any haven allure for USTs, though Monday’s dovish Fed commentary and the marked energy pressure prevented USTs from moving significantly lower. Down to a 111-06 trough overnight, but one that is markedly clear of the 110-25 WTD low from Monday’s European morning.


• Reports of Iran violating the ceasefire this morning, and Israel saying it will respond by striking strategic targets in Tehran, have seemingly sparked a modest haven bid for the benchmarks. Though one that is very limited and only sufficient to take USTs to 111-14, which is still in the red by half a tick and shy of Monday’s 111-20+ peak


• Ahead, the docket is packed. The headline event is Chair Powell’s semi-annual testimony to the House. Testimony that will be scrutinised in the context of commentary from Governors Waller and Bowman who in recent days have signalled an openness to a July cut. As it stands, markets imply just a 22% probability of a cut in July, but with a move essentially priced for September (-24.1bps implied).


• Powell aside, we also hear from Fed’s Hammack (2026), Williams (Voter), Kashkari (2026), Collins (2025), Barr (Voter); intersected by Consumer Confidence (seen ticking higher) and Richmond Fed for June. Additionally, supply gets underway with a USD 69bln 2yr sale, ahead of the tap the 2yr part of the curve is marginally lagging its short-end peers but is trading broadly in-line with the 10yr.

Bunds: -17 ticks, 130.90

• The Q3 revised issuance outlook, followed an update to the 2025 plan on Monday that pointed to EUR 143bln of new borrowing for core and special funding. Today’s update for Q3 showed a modest increase vs the preliminary Q3 targets with issuance also higher Q/Q. In totality issuance will be EUR 19bln more than planned. An uptick that is “in light of the government's financial package for infrastructure and defence”.


• This came alongside June’s Ifo, which printed firmer than the prior across the board and while Business Climate and Expectations surpassed expectations, Conditions came in slightly soft. As a reminder, that follows better than expected Flash PMIs on Monday, on which HCOB wrote “there is now a decent chance that Germany could break from the start-stop pattern of the last two years”.


• In totality, the two releases sparked some modest two-way action in Bunds in a 130.78-92 band, with a very slight upward direction since, but one that leaves Bunds in the red and shy of the sessions earlier 131.18 peak and within Monday’s 130.47-131.20 confines.


• Ahead, the docket is also packed with central bank speakers. From the ECB, we have de Guindos, Kazimir, Lagarde and Lane on two occasions, including a text release. Into this, markets currently imply just a 10% chance of a cut in July, around a 45% chance in September, ~60% in October and a move not quite priced in December (-23.3bps).


• This morning, ECB’s Villeroy spoke with the FT and outlined that recent Middle-East inspired energy moves had not changed the underlying outlook for inflation, writing that significant EUR appreciation was partially offsetting it; recall, HCOB had a similar assessment alongside Monday’s Flash PMIs. Overall, Villeroy surmised that if moderate inflation expectations were confirmed, it could lead to further easing in the next six months; slightly more dovish than referenced market pricing.

Gilts: -16 ticks, 92.95

• Softer and trading marginally heavier than peers, potentially as a function of confirmation that the UK will pledge to increase defence spending to 3.5% (prev. 2.3%) by 2035. In slight contrast to Bunds and USTs, Gilts have exactly matched Monday’s 92.25-93.21 confines, but are yet to breach them.


• UK-specific newsflow is a little sparse, nothing pertinent within a speech by BoE’s Bailey on the gold standard. However, as above, the speaker docket is packed and features BoE’s Greene, Ramsden, Pill, Breeden and Bailey once again.


• Ahead of that, markets price around a 63% chance of a cut in August, fully price one in September and see another occurring in December.


• Monetary aside, attention remains on the fiscal situation, as discussed above; The Times’ Swinford neatly surmises "Something will have to give. The Autumn budget is looking more difficult by the day. Tax rises look inevitable".

24 Jun 2025 - 10:05- Fixed IncomeEU Research- Source: Newsquawk