EUROPEAN FIXED UPDATE: Weighed on by US-China trade developments

USTs: -16+ ticks, 110-09+

• Today’s session began with a bearish bias as APAC trade was focussed on the initial language coming out of the US-China talks and source reporting around it, remarks/reports pointed to a positive outcome.


• As such, USTs were lower overnight in-fitting with pressure in JGBs, action that saw the Japanese 30yr yield continue its climb to yet another recent peak and its highest in over 20 years. JGBs themselves as low as 140.00 overnight before slumping to a 139.37 base following the 08:00BST statement.


• The US-China joint statement and accompanying separate press conferences saw 115ppts of reciprocal measures removed by both sides (US now 30%, China now 10%) for a 90-day period. An update which sparked immediate and continuing pressure in the fixed income space.


• Specifically, USTs down to a 110-06 trough from 110-13+ pre-release. US yields are firmer across the curve and markedly flatter as expectations for Fed easing trim in the near-term. Currently, a 25bps cut in June has an implied probability of around 8% with just 56bps of implied easing seen by end-2025.


• While the US-China deal is a positive there are a few outstanding points from it: 90-day, what happens after the pause if no breakthrough; fentanyl, as USTR Greer says the issue is unchanged though mentioned a positive track; currency, no discussions occurred; industry-specific measures, focus was on reciprocals not specific assets; Treasuries, not mentioned by Bessent.

Bunds: -77 ticks, 129.98

• Reacted to the above, sending Bunds lower by over 30 ticks at/just after the joint statement. Since, it hit a 129.92 low vs 130.49 open levels. However, as the European risk tone comes off best and equity bourses/futures in the region give back much of the upside, EGBs have lifted off lows by around 15 ticks.


• A lifting in EGBs that has seemingly occurred as participants digest the language from US officials regarding the EU. Specifically, Bessent said that while the UK and Switzerland have moved to the front of the queue, the EU “is much slower”.


• Language that echoes the tone from US Trade Advisor Navarro last week who said while the EU is high on the priority list, the action the EU has taken is unfortunate.


• Nonetheless, EGBs remain lower across the board with yields bid across the curve and action in-fitting with USTs as the short-end leads the way and the curve flattens as participants pare views on the magnitude of near-term ECB easing to expect.

Gilts: -61 ticks, 91.86

• In-fitting with the above, gapped lower by 58 ticks as the statement coincided with the open itself. Thereafter, slipped to a 91.69 base in-fitting with broader price action. Remained in very close proximity to that low since.


• Language from Bessent that the UK is, alongside Switzerland, at the front of the queue is of note after last Monday’s trade announcement. This could indicate that further developments are forthcoming.


• Note, US President Trump will be in the UK for around 90 minutes this evening, according to the Sun’s Cole; for refuelling on his way to the Middle-East. As it stands, it is unclear if any UK official will be meeting with him.


• No reaction to remarks from BoE’s Lombardelli this morning. Commentary from Lombardelli (who voted for 25bps) included that she is mainly focussed on wage growth, she views wages as being too high to be consistent with inflation being at target. Furthermore, she said that domestic inflation progress, not US tariffs was the main driver behind her decision to cut.

12 May 2025 - 10:00- Fixed IncomeEU Research- Source: Newsquawk