EUROPEAN FIXED UPDATE: USTs sag into 20yr auction, Bunds bid on German Producer Prices, Gilts initially lagged on CPI but now firmer

USTs: -2.5 ticks, 111-22

• USTs are lower and underperforming vs peers, after trading with a slight downward bias overnight. Nothing specifically driving the pressure, but perhaps some cooling from the upside seen in the prior session, where stocks took a beating. Some of the pressure could also be in part due to some positioning heading into a 20yr supply later. Taking a look at recent history, the previous 20yr bond auction was a strong outing with the b/c at 2.79x.


• Elsewhere, US President Trump continued his verbal assaults on Fed Chair Powell, once again calling him “Too Late” Powell, and suggested “every sign is pointing to a major Rate Cut”. Interesting comments from Bessent are also worth pointing out; he said that the crypto industry will become a crucial buyer of Treasuries in the coming years as Washington seeks to shore up demand for a deluge of new US government debt, according to FT. This hasn’t quite been reflected in price action today.


• From a yield perspective, there is some outperformance in the long-end. This has been attributed to recent commentary via the US Treasury Secretary Bessent, who stated that he will need to “substantially” revise up his tariff revenue forecast of USD 300bln/yr. This will help alleviate some fiscal-related fears, which has been impacting trade on the long-end over the past few months.


• In terms of price action today, USTs in a 111-20 to 111-24 range, price action fairly contained thus far. Upside levels include Tuesday’s peak at 111-26 and then a tick higher marks the peak from Monday.


• Auction aside (mentioned earlier), focus will be on commentary from the Fed’s Waller and Bostic – though the former is not expected to touch on monetary policy, but rather on “Payments”. Also of note is an interview of the reported Fed Chair candidate Zervos, who is to speak on CNBC.

Bunds: +15 ticks, 129.22

• Bunds are outperforming vs peers today, with the bulk of the day’s action occurring at 07:00 BST. On that, there was some significant two-way movement in Bund futures as traders reacted to the UK CPI report (hotter-than-expected; details in Gilt section) and German Producer Prices (softer-than-expected). Elsewhere, no real move to commentary via ECB President Lagarde, who noted that projections show growth is expected to slow in Q3.


• To recap the German data; Y/Y printed at -1.5% (exp. -1.3%), with the M/M metric also a little lower at -0.1% (exp. 0.1%). Taking a look at the accompanying release, “lower energy prices were the main reason for the year-on-year decline in producer prices” – that excluded, Y/Y producer prices still fell 0.2% from the prior month.


• In terms of price action, Bunds currently trade in a 128.88 to 129.28 range; the trough of the day, in an initial reaction to the UK’s inflation report, but then quickly reversed to then make a fresh high at 129.28 in the 20 minutes following the Producer Prices release. Since, price action has been fairly sideways just under highs.


• Ahead, EZ HICP (Final), and then a dual tranche German outing; IFR highlights that despite month-end dynamics and scarcity of primary market paper at the moment, "there is a significant risk that this auction comes on the soft side".

Gilts: +13 ticks, 90.80

• Gilts are firmer today, initially gapping higher at the cash open in catch-up to the strength seen in USTs in the prior session, but then saw some two-way action as traders digested the UK’s hot inflation report.


• Delving into the UK CPI report, it held a hawkish skew, with both Core and Headline figures incrementally higher, edging higher than the prior, more than expected. The accompanying commentary provided some reasoning, pinning the uptick on the “timing of this year’s school holidays”. As for Services – it was also hot; Y/Y ticked up to 5% from 4.7% (exp. 4.8%). The main driver for the increase was due to “a hefty increase in air fares, the largest July rise since collection of air fares changed from quarterly to monthly in 2001”. ING opines that this report will not be a “gamechanger” for the BoE, writing that the Bank will not be too concerned by the report given it was primarily driven by airfares. Money markets were not really too moved by the data, with the next full rate cut expected to be delivered in April 2026 (u/c from pre-release).


• Gilts opened higher by around 8 ticks – potentially just following the strength seen in USTs in the prior session. Though as the dust settled, traders digested the latest inflation report to trade in a very narrow 90.43 to 90.80 range; the trough today matches that of Tuesday’s. Limited reaction, potentially given the lack of immediate implications for the BoE.

20 Aug 2025 - 09:55- ForexData- Source: Newsquawk