GILTS: Bear Flattening, Mostly Driven By Cross-Market Cues

Bund futures are +51 ticks at 129.62, rallying on improved volumes and fully retracing yesterday afternoon’s selloff. Initial resistance is 129.83. Much like yesterday’s price action, there hasn’t been a clear driver to note, with strength coming despite a 0.7% rally in European equities and impending 10-year Bund supply. 

• The German curve has bull flattened, with 30-year yields down 5.5bps. 10s30s closed at 55bps yesterday, the steepest since June 2021. The spread is currently back at 54.4bps. Bull flattening on the cash bond curve has translated to outperformance for long end swap spreads & ASWs.
• European equity strength promotes peripheral and semi-core EGB/Bund spread tightening, with the 10-year BTP/Bund spread notably 1.5bps narrower at 77bps (tightest since 2010). A persistent pullback in EUR rates vol since the April tariff-induced volatility episode has been a key driver of BTP spread tightening in the last few months.
• Today’s regional data saw German and Spanish final July HICP confirm flash estimates. The data did not move markets. 

Gilts have rallied alongside global peers, reversing yesterday’s afternoon sell off, but remain softer than late Monday levels across much of the curve in the wake of yesterday’s labour market report.

• Weaker oil prices have provided some support today.
• Others have pointed to late Tuesday comments from U.S. Tsy Sec Bessent, suggesting the Fed should be open to a 50bp cut, although you would expect bull steepening on the curve if that was a meaningful driver, as opposed to the bull flattening seen today.
• Futures trade as high as 92.00 before fading back to 91.90.
• Bears have countered recent bullish technical developments.
• They look to yesterday’s low (91.51) as their first target, which protects the Aug 1 low (91.44) and July 18 low/bear trigger (91.08).
• Conversely, bulls need to close yesterday’s opening gap lower (~92.25) before switching focus higher.
• Yields 2-3bp lower across the curve, modest flattening noted.
• Fiscal issues continue to dominate local headlines. Guardian sources have reported that “the Treasury is looking at ways to raise more money from inheritance tax amid growing pressure on the country’s finances ahead of the autumn budget”.
• Curve steepening risks remain intact, albeit with crowded positioning and a more activist approach from policymakers when it comes to managing spikes higher in long end yields posing risks to that idea.
• BoE pricing steady, showing 16bp of easing through year-end, next cut fully discounted come the end of the Feb ’26 MPC.
• Little of note on the UK calendar today, with monthly economic activity and Q2 GDP readings due tomorrow.

SX7E (15th Aug) 230, bought the call for 1.65 in 3k (100% del).