BONDS: 10-year Gilt/Bund Spread Widens 1bp, Market Awaiting Fresh Cues
The 10-year Gilt/Bund spread is 1bp wider today at 199bps, amid a fairly subdued start to the weak. The spread reached a multi-month closing high of 203bps on August 27.
- Data hasn’t had a discernible impact on FI market pricing: German July industrial production was stronger-than-expected at 1.3% M/M (vs 1.0% cons; prior revised to -0.1% from -1.9% initial) while the September Euro Sentix survey was weak at -9.2 (vs -2.0 cons, -3.7 prior). In the UK, the KPMG-REC report on jobs continued to portray a softening labour market.
- The German curve has lightly twist flattened, but 5s30s is only 0.7bps flatter at 106.9bps.
- Meanwhile, Gilt yields are 0.5-1.5bps higher, with a bear flattening dynamic in play. UK 5s30s is hovering around trendline support drawn from the November 2024 low, currently at 144.9bps.
- Futures ranges have been tight, with Bunds -2 ticks at 129.07 and Gilts -4 ticks at 91.19.
- 10-year EGB spreads to Bunds are up to 1bp tighter, led by BTPs. The BTP/Bund spread is back at 83bps after testing 90bps last week.
- French PM Bayrou is expected to be ousted by a no-confidence vote this afternoon. Market prices may already incorporate an expectation for a new administration to make budget concessions, potentially limiting the scope for further OAT/Bund spread widening following the vote.
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AUSSIE 10-YEAR TECHS: (U5) Recovers With Treasuries
- RES 3: 96.501 - 76.4% of the Mar 14 - Nov 1 ‘23 bear leg
- RES 2: 96.207 - 61.8% of the Mar 14 - Nov 1 ‘23 bear leg
- RES 1: 95.960 - High Apr 7
- PRICE: 95.710 @ 14:34 BST Aug 8
- SUP 1: 95.415/95.300 - Low May 15 / Low Jan 14
- SUP 2: 95.275 - Low Nov 14 (cont) and a key support
- SUP 3: 94.707 - 1.0% 10-dma envelope
Aussie 10-yr futures received a boost from the US Treasury rally that followed a poor NFP print. This keeps Aussie 10-year futures toward the top end of the recent range. To the upside, next resistance is at 96.207, a Fibonacci retracement point. Next support undercuts at 95.420 (pierced), the Feb 13 low, ahead of 95.275, the Nov 14 low and a key support. Clearance of this level would strengthen a bearish condition.
SECURITY: Trump To Sign Trilateral Peace Accord With Armenia/Azerbaijan Shortly
US President Donald Trump is shortly due to sign a trilateral peace agreement with Armenian Prime Minister Nikol Pashinyan and Azerbaijani President Ilham Aliyev at the White House. LIVESTREAM The event will provide another opportunity for Trump to style himself as peacemaker, after touting success in brokering peace deals between Rwanda/Congo, Cambodia/Thailand, and India/Pakistan.
- The accord aims to resolve a decade-long dispute over the sovereignty of Nagorno-Karabakh - a breakaway Azerbaijani province that was under de facto Armenian control from the dissolution of the Soviet Union until a 2020 war.
- Trump described the meeting on Truth Social as a “historic peace summit,” noting that the US will also sign “Bilateral Agreements [to] fully unlock the potential of the South Caucasus Region.”
- White House spokeswoman Anna Kelly told reporters that Trump would sign deals with both Armenia and Azerbaijan on energy, technology, economic cooperation, border security, infrastructure and trade.
- A White House official said: "It's about the entire region, and [the leaders] know that that region is known to be safer and more prosperous with President Trump."
- Reuters reports that the US will have development rights to build transportation links in the strategic Zangezur Corridor, a mountainous stretch of Armenian territory between Azerbaijan and its Nakhichevan exclave.
- Politico notes: “But whether this is just a photo opportunity or a lasting end to a conflict that has undermined stability in a region dominated by Russia and Iran will depend on whether the US can address several key challenges.”
FED: Balance Sheet Runoff Continues At Steady $20B/Month Pace (2/2)
Fed asset holdings were little changed in the past week. SOMA runoff totaled $2.8B (composed of $4.2B less nominal Tsy holdings and $1.4B more TIPS), with emergency lending/liquidity facilities $0.7B lower.
- Over the last 4 weeks, the $20B/monthly expected QT pace was roughly adhered to: MBS fell $18B, with Treasury net holdings down around $2B (a fall in TIPS holdings offsetting a slight rise in nominals).
- Discount window usage accounted for the fall in lending facility usage this week; takeup is now down to $4.9B, down $1.3B in the last month and down from the 1-year high of $6.4B set in July which looks to have been a temporary blip higher.
