BONDS: 10-year Gilt Bund Spread Testing August 1 Low Following Soft UK CPI
The 10-year Gilt/Bund spread is 7.5bps tighter on the session at 185bps, testing the August 1 closing low. Clearance of his level would expose the March 11 low at 177.5bps. The softer-than-expected UK CPI data has been the main event of the morning, with 10-year Gilt yields down 8bps and holding close to session lows of 4.404%. 10-year Bund yields have erased the earlier fall to trade little changed at 2.552%. Initial support in 10-year Gilt yields at 3.363% remains intact for now.
- The Gilt curve trades bull steeper, with 2-year yields down 9.5bps and 30-year yields down 7bps. The German curve has seen a much more modest bull steepening.
- BOE-dated OIS now price a ~30% implied probability of a 25bp cut in November, with around a 70% implied probability of a cut by year-end (up from ~40% at yesterday’s close).
- In futures, Gilts are +74 ticks at 93.66 on healthy cumulative volumes. Next resistance is the 1.500 proj of the Sep 3 - 11 - 26 price swing at 93.95. Today’s gap higher has strengthened the bullish condition.
- Bund futures are +9 ticks at 130.30, off session highs of 130.38 seen just ahead of the cash equity open.
- At 1030BST, Germany will reopen its on-the-run 7-year 2.50% Nov-32 Bund for the second and final time this year.
- Regional focus turns to Friday’s flash October PMIs in the UK and Eurozone. The remainder of today’s calendar is light – we don’t expect much new from ECB’s de Guindos or Lagarde.
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FED FUNDS FUTURES: FFX5 Sold
Recent trade in FFX5 saw ~6.8K given at 96.145, with a further 2K trading at that level on the follow, small bid there last.
EGBS: Bunds Move Away From Initial Support; Spreads Widen On Equity Downtick
Bund futures have moved away from previously noted support at 128.04, now +7 ticks at 128.26. Initial resistance is the 20-day EMA at 128.63.
- Bunds have found light support from a pullback in European equity and Brent crude futures this morning. Headline flow has otherwise been light.
- German yields are up to 0.5bps lower across the curve.
- The downtick in equities contributes to a modest widening of 10-year EGB spreads to Bunds (up to +1bp). OATs the marginal underperformer after the once-notch sovereign rating downgrade of France from Morningstar DBRS on Friday. BTPs don’t see much of a lasting tailwind after Italy received the (at least partially expected) one-notch rating upgrade from Fitch
- EGB supply is due from the EU and Belgium this morning. Note that this will be the first auction at which the EU will hold a second non-competitive round (at which a further 20% would be available the following day).
- No key regional data to start the week, with focus on tomorrow’s flash PMIs.
- ECB’s Lane and Nagel are scheduled to speak later. Broader GC commentary since the September decision suggests there is little appetite for another rate cut this cycle, with most officials deeming rates to be appropriate at current levels for now.
GILTS: Basis Trade
Gilt Basis trade, suggest Cash seller:
- G Z5 2.44k at 90.76.
