UK T-BILL AUCTION RESULTS: 1/3/6-month UKTBs

OI data points to a mix of net short setting and long cover during Tuesday’s downtick in futures, with the most meaningful net positioning swings coming via net short setting in TU futures and net long cover in FV futures.

• Another pop higher for CHFJPY overnight has seen the cross extend its impressive recent surge to fresh record highs of 184.57, expanding the rally from the June lows to ~6%. With both USDJPY and USDCHF around 1% off their most recent highs and lows respectively, there appears room for a short-term continuation of this trend, potentially placing the cross at levels around the 188.00 mark.
• When assessing the drivers of CHF strength, Bank of America believe part of the answer lies in the CHF options market: “We look at USD/CHF 1yr implied volatility versus the average of G10/USD 1yr implied. Overlaying with CHF/USD. USD/CHF vol premium is now the highest since 2017. Whilst still trading at a discount, this is highly unusual and we believe the anchor to this move is US fiscal dominance - and the rise of term premium in both the US and Japan.”
• If, as they think, fiscal concerns will be a more pervasive part of market thinking, it is difficult for the SNB to use traditional policy levers to wrestle control from markets, vindicating BofA’s ongoing suggestion that the SNB should "think outside the box" for solutions to the "problem" of CHF strength.
• In their view, the SNB could either abandon the inflation target (unlikely) or adopt an FX framework which places much greater emphasis on FX management rather than rate setting. In effect, we argue that rate setting becomes an endogenous variable and adjusts to achieve the SNB's FX objectives. Only then do BofA think there is a realistic chance of meaningful CHF correction.

Bund futures have traded in a relatively contained 35 tick range this morning, with topside seemingly limited by this morning’s rally in European equities and crude oil/gas futures. Bunds are +6 ticks at 129.70, with yesterday’s high at 130.10 untested. 

• Markets have mostly looked through yesterday evenings tariff headlines. Although US President Trump’s threat of a 200% pharma tariff would have significant ramifications for the likes of Ireland, Italy and Germany if implemented, the market impact is dampened by (i) Trump’s history of pulling back from his most extreme threats and (ii) yesterday’s comments already suggesting there would be a 1/1.5-year phase in period.
• EGB curves have steepened through July, which has partly been spillover from moves in long-end JGB/Gilt yields. Today’s price action has seen these trends unwind slightly though, with curves lightly bull flattening.
• German yields are up to 1bp lower, despite today’s 15/20-year Bund supply. The Bund results were mixed, with the May-41 line seeing softer cover ratios than the previous outing and the July-44 line seeing stronger demand.
• 10-year EGB spreads to Bunds are within 1bp of yesterday’s closing levels. Portugal also sold OTs this morning.
• Very light regional data calendar today, leaving focus on ECB speakers (Lane, de Guindos, Nagel).