EUROPEAN FIXED UPDATE: US and European yields diverge on tariff updates, Gilts move below the Spring Statement low

Bunds: +10 ticks, 128.24

• The overnight updates from POTUS have added to the bloc's growth concerns and, despite the accompanying inflation implications, has seen implied ECB easing lift back over 50bps by end-2025 with an 80% chance of a move in April.


• Reminder, numerous officials have said that a pause should at least be on the table at the April gathering, remarks from Wunsch this morning are the most recent example.


• In terms of the implications of the tariffs for Germany, the IfW has calculated that short term real GDP would be 0.18% lower, an impact IfW’s Hinz describes as limited and manageable, adding that Europe as a whole “will feel little impact” given automakers primarily supply the US market from local facilities.


• Nonetheless, Bunds find themselves in the green but have been fading from early highs of 128.69 and are at a low of 128.19. Specifics since the open somewhat light with participants digesting the tariff updates and assessing potential retaliatory measures that could be taken.


• The move may be a function of benchmarks reacting to European equities lifting off worst levels, modest strength in US equity futures and/or a refocusing on the inflationary implications. More broadly, USTs are in the red and at fresh lows which is likely weighing.

USTs: -11 ticks, 110-07

• As mentioned, at a low of 110-08+ having faded gradually overnight but more intensely in recent trade from an overnight 110-21 peak. Again, specifics somewhat light in recent trade with markets entirely focussed on the latest tariff/trade rhetoric and the global inflationary implications of such measures.


• That aside, the docket for the US features 7yr supply which may be adding to the bearish action seen thus far. As a reminder, the sale follows a 2yr on Tuesday which was strong against recent averages but not to the extent seen in February while Wednesday’s 5yr showed signs of softer demand.


• A handful of notable data points ahead with Q4 GDP/PCE revisions due and the weekly claims data from which the continuing figure matches the BLS survey window. Points which follow the AtlantaFed GDPnow tracker on Wednesday, which saw the headline maintained while the gold adj. figure was trimmed to 0.2% (prev. 0.4%).


• The inflationary implications of tariffs are lifting yields across the curve, which itself is steepening. In terms of the Fed, for which implied action is seeing a hawkish move in contrast to the modest dovish one in Europe, there is currently just a 15% implied probability of a cut in May with around 60bps of easing implied by end-2025.

Gilts: -63 ticks, 90.70

• In the red after opening with very modest upside. Pressure which comes given the inflationary implications of the above and despite officials in the UK stressing that they do not plan to retaliate to US action and are seeking favourable deals.


• Action which is also influenced by continued digestion of the Spring Statement which left the Chancellor with another particularly low level of headroom and has upped the ante for further spending cuts and possible tax increases in the Autumn Budget; the latter being something the Chancellor did not explicitly rule out in the morning’s press briefings.


• Illustrating the point, IFS’ Johnson remarked that the Chancellor has “all but guaranteed” another period of speculation and uncertainty ahead of the Autumn Budget, similar to what was seen after the October’24 announcement. On this, Johnson writes “That didn’t go well between last July’s election and October’s Budget. I fear a longer rerun this year.”


• As it stands, Gilts are at a 90.55 trough, below Wednesday’s 90.75 low which printed during the statement on the 5yr borrowing assessment and cautious headroom commentary from the OBR. A low which has also taken out the early-March base and leaves just 89.59 before the 89.23 contract low.


• For yields, they are picking up across the curve given the inflation implications of Trump’s tariff comments and as Reeves’ thin fiscal margin is already under scrutiny. Action which has lifted the 10yr to a 4.798% high; as a reminder, the 2025 peak is 4.925%.


• Most recently, 2031 DMO supply was well received with the b/c above the 3.0x mark. An outing which has seemingly helped Gilts mark a floor for the day and are around 15 ticks up from the mentioned low following the results

27 Mar 2025 - 10:15- ForexEU Research- Source: Newswire