EUROPEAN FIXED UPDATE: Yields wilt after Trump's Rose Garden speech, desks diverge on Fed implications

USTs: +27 ticks, 112-11

• Bid given the US tariff announcement where the initial relief on reporting around a 10% baseline gave way to marked risk-off as the reciprocal levels were announced. Full recap of this is available on the headline feed, but in brief the average US effective tariff rate is (once the measures are implemented) around 23% from around 10%.


• Hit a 112-24+ peak in the hour after Trump’s speech, at best the benchmark posted gains of around 40 ticks and the 10yr yield hit a 4.04% low, a base which takes us back to November 2024 when the yield was below the 4.0% handle.


• Further insight into Trump’s tariffs and how the administration feels about the initial comments/responses to the measures from various nations may be provided VP Vance and Commerce Secretary Lutnick who are due to speak from around 13:00BST.


• Desks have already begun to change their Fed calls with Morgan Stanley no longer expect a June cut due to “tariff-indcued inflation”, and expect the Fed to be on hold until March 2026. The desk adds that they see scope for yields to fall further as markets contend with a “fewer cuts now, more later” mantra and as such continue to suggest investors position for lower yields.


• A narrative that is marginally reflected on the US yield curve, as while yields are lower across the curve the belly/10yr is leading the short-end lower by around one bps for 2s5s; though, this dynamic has moderated across the morning as the pressure seen in the long-end eases slightly.


• On the flip side, and more in-fitting with current price action, UBS expects the Fed to deliver 75-100bps of cuts by end-2025 given the growth implications of tariffs. As it stands, there is around 80bps of easing implied by end-2025 vs c. 75bps Wednesday morning.


• Ahead, alongside the mentioned points, we have data via weekly claims and the ISM Services measure though of course the Rose Garden announcement by Trump reduces the pertinence of the figures. Additionally, Fed speak via Cook and Jefferson (both voters), we expect a text and Q&A from both officials and will be attentive to any initial thoughts on the implications of Trump’s tariffs for Fed policy.

Bunds: +46 ticks, 129.54

• Peaked at 129.94 after Trump’s tariff announcement; full recap on the feed. A high that takes Bunds around half of the way back to the pre-fiscal change levels. With, as a function of the move lower on fiscal reform, the next chronological resistance point someway off at 132.04.


• While Bunds peaked at 129.94 and are in the green, they have been pulling back gradually throughout the morning. A dynamic that has also been seen in USTs though is much more pronounced in EGBs. A pullback which is likely a function of European bourses picking up off worst levels in the morning, though still well into the red, and potentially as the knee-jerk move on growth concerns/general risk is tempered by inflationary concerns.


• As it stands, the EU has not formally retaliated. However, a French spokesperson says the likely first response will be mid-April (reminder, the reciprocal implementation date is April 9th) and then another later in the month. Given this, there remains a window of opportunity for negotiations to take place.


• For the ECB, the pronounced market action has sparked a dovish move with an April cut at roughly a 90% implied probability while almost 70bps of easing is seen by end-2025. It remains to be seen whether the ECB will cut to this degree, or if a deal can be done to offset the growth hit and/or price pressures prevent them from taking such action.


• Supply passed without incident and equally there was no reaction to the morning’s final PMIs which were subject to modest revision, but of course do not account for the latest measures. Ahead, ECB’s Schnabel due and will be keenly sought for her insight into the measures and the potential monetary response; reminder, Schnabel is a hawk and believes the ECB is in the neutral rate window.

Gilts: +38 ticks, 92.53

• UK benefits as a function of leaving the EU, with the nation subject to just the 10% baseline tariff, for now at least. Nonetheless, the benchmark gapped higher by 58 ticks and then extended by another 41 to a 93.14 peak. Stopping just shy of a cluster between 93.33-79 from early-March.


• UK PM Starmer is meeting with his cabinet and officials this morning to discuss the measure and continue working on the US-US economic deal, a deal the Times’ Swinford reported as being essentially done earlier in the week with the US waiting for “Liberation Day” to pass before moving forward with it.


• Given this, we await any updates on the timing of the deal and particularly for anything to suggest that the 10% baseline level that the UK is subject to could be reduced. If so, this would place the UK in an even more favourable position vs European peers (subject to 20% currently). However, the growth implications of any tariff mean that Reeves’ razor thin fiscal margin is already under pressure.


• For the BoE, market pricing has moved in a dovish fashion given the global fixed income rally. The odds of a May cut at near 80% at best with over 60bps of easing seen by end-2025.


• No reaction to the DMO's 2040 tap which came in slightly soft on despite the higher yield on offer, perhaps a reflection of ongoing concern around the UK's fiscal position

03 Apr 2025 - 10:20- ForexEU Research- Source: Newsquawk