EUROPEAN FIXED UPDATE: USTs pause for breath whilst Bunds slip

USTs: -2.5 ticks, 112-02

• USTs are essentially flat and trade in a very narrow 4 tick range (112-01 to 112-05), as US paper takes a breather from Friday’s significant upside following dovish remarks from the Fed Chair. From a yield perspective, there is some mild bear flattening, with the short-end making back some of Friday’s pressure.


• To recap briefly, Powell said that the situation suggests downside risks to employment are rising, highlighting that the balance of risks may warrant adjusting policy. Since his remarks, a number of major banks have brought forward their call for a September rate cut (Barclays prev. saw December; BNP Paribas prev. saw no cuts in 2025). Analysts at SEB suggest a September cut is a “done deal” and see a quarter-point cut at every meeting for the remainder of the year. Money markets currently price in a 84% chance of a cut in September and fully price in 53bps by year-end.


• Despite the dovish signals made by Chair Powell, President Trump remained unimpressed and said “that it is still too late and they should have cut rates a year ago”. Elsewhere, markets digested comments from Fed’s Musalem who remained cautious ahead of the September meeting, by saying he would like to see more data.


• On the trade front, on Friday Trump announced a tariff investigation on US furniture imports, with completion expected within 50 days and the tariff rate is yet to be determined. Elsewhere, Canadian PM Carney confirmed that Canada will remove its counter tariffs on all US goods covered by the USMCA trade deal, effective September 1st, 2025.

Bunds: -38 ticks, 129.06

• Bunds are trading on the backfoot and currently lower by around 38 ticks, pulling back from the upside seen on Friday. Currently trading towards the bottom-end of a 129.02 to 129.31 range; further downside will see a test of the round 129.00 mark, and below that 128.94 (the lower from Friday). From a yield perspective, the German 10yr is currently higher by 3.7bps at around 2.756%.


• Focus has been on the ECB over the weekend. Firstly, Reuters reported that ECB rate cut talks may resume after the September pause, should the economy continue to deteriorate. This comes despite reports last Friday via Bloomberg which suggested that ECB officials are reportedly to stick with the steady-rates plan following the trade deal with the US.


• As for ECB speak, ECB President Lagarde said that Europe’s labour market has remained resilient despite severe inflation shocks and aggressive rate hikes. Elsewhere, ECB’s Nagel said the bar is high for another rate cut whilst Kazaks said rates are in a good place – in contrast to those aforementioned sources earlier. On the trade front, EC’s von der Leyen defended the EU-US trade agreement, saying it’s the “best we could get” and it was “strong, if not perfect”.


• On the fiscal side of things, German Chancellor Merz said that a welfare state is no longer financially viable given our economic performance – calling for welfare reforms. The Chancellor has ruled out any tax increases, but SPD is open to tax increases and will likely push back on any major cuts to the current welfare policies. So, whilst on face value Merz’s call for welfare cuts would be positive for Bunds, traders may focus on any political disagreements between the CDU and SPD coalition.


• Docket today has been very thin, aside from German Ifo metrics which were mixed; Business Climate and Expectations topped expectations, whilst Current Conditions slipped a little. Ahead, an EU auction where 3y, 10y and 13y bonds will be on offer; the sale should go well, notes IFR but highlights the UK Bank Holiday and summer conditions as potential demand headwinds.

Gilts: Closed

• Gilt futures trading is currently shut today on account of the UK’s Bank Holiday.


• BoE commentary over the weekend included Governor Bailey, who said the UK faces an “acute challenge” to raise potential economic growth due to weak workforce participation. Speaking at the Fed’s Jackson Hole symposium, he noted the issue is no longer unemployment, and boosting productivity will be essential unless more Britons rejoin the labour force.

25 Aug 2025 - 10:00- ForexEU Research- Source: Newsqauwk