EUROPEAN FIXED UPDATE: Weighed on by upward revisions to PMIs, Gilts lag after US metal measures

USTs: -2 ticks, 110-12+

• A contained start to the day. Focus overnight was on the largely as expected implementation of Trump’s 50% steel and aluminium tariff rate for all ex-UK, which is subject to a lower 25% rate, for now.


• That aside, specifics for USTs firmly focussed on relations between the US and China. A call between Presidents Trump and Xi is expected on Friday, ahead of that Trump posted that he likes Xi but he is “very tough and extremely hard to make a deal with”; a post that is of course notable, but didn’t really impact at the time (ex-Yuan).


• USTs currently hold at the low end of a 110-12+ to 110-18+ band, the low hit alongside mostly upward revisions to the morning’s PMIs from the EZ and member nations.


• Ahead, the US awaits its own PMIs before the ISM Services figure, before that though ADP is scheduled and expected to lift to 110k (prev. 62k) before NFP on Friday, payrolls seen at 130k (prev. 177k). Finally, Fed’s Bostic and Cook both attend an event on Monetary Policy, a text is expected from Bostic.

Bunds: -23 ticks, 131.07

• A slight bearish bias overnight but not particularly pronounced. This bias accelerated throughout the European morning in the wake of Final PMIs. No overly significant reaction to any one figure, but Bunds fell from 131.30 to the 131.04 low across the PMI window.


• Alongside the EZ figure, where the Composite was revised into expansionary territory, HCOB writes that for the rest of 2025 further easing by the ECB and fiscal stimulus, particularly from Germany, “will be sufficient to offset the negative effects of higher tariffs and increased uncertainty".


• On the ECB, June’s decision will be announced tomorrow and while a 25bps cut is all but certain the degree of consensus around this is much less clear, as is the timing for any additional cuts this year; as it stands, markets imply around 55bps of easing by end-2025 (incl. June).


• No auctions for the bloc today though, books for an upcoming Italian 5yr BTP and 2037 Green bond have together eclipsed EUR 180bln; guidance set at +8bps and +6bps respectively. BTPs trading broadly in-line with Bunds thus far.


• Ahead, the European schedule is light except for another meeting between EU Trade Commissioner Sefcovic and US counterpart Greer, timing TBC. As such, impetus will likely be drawn from the busier US docket.


• Note, some reports suggest that we may find out if Le Pen’s election ban will be upheld or not today while the ECB is to publish its latest convergence report, expected to recommend that Bulgaria adopts the EUR next year.

Gilts: -42 ticks, 91.50

• Under pressure throughout the morning in catch-up to the general overnight tone, the above factors (particularly PMIs) and ahead of supply. Additionally, yields pushed higher by the inflationary implications of the UK finding itself subject to 25% tariffs on metals; while better than global peers, the levy is a disappointment for those who hoped the UK-US deal would result in a full exemption.


• Only a few fleeting downticks to the region's own PMIs, as Gilts came off alongside the EZ ones, metrics which were subject to upward revisions and lifted the Composite figure into expansionary territory. On the release, HCOB wrote that the overall rate of cost inflation has eased from April’s peak with the survey showing the “slowest rise in price charged by service providers since last October”.


• A finding that is welcome for the BoE and perhaps explains why only a few ticks of downside were seen in Gilts following the data. Overall, Gilts entered the auction-window at the low end of a 91.45 to 91.90 band, underperforming peers by around 10 ticks or so and beneath Tuesday’s 91.71 trough though still comfortably clear of Monday’s 91.16 base.


• The DMO’s 2028 tap passed without incident. Overall, a strong auction though slightly mixed vs. the prior but overall unremarkable. Nonetheless, the results were sufficient to lift the benchmark off lows by around five ticks.


• Elsewhere, an ongoing announcement from Chancellor Reeves on UK infrastructure spending, today’s details have (thus far) all been pre-announced in the press and as such UK assets are unreactive. Reminder, the full department spending review will be released next Wednesday and include more infrastructure plans and investment by the government.

04 Jun 2025 - 10:15- Fixed IncomeEU Research- Source: Newsquawk