GILTS: Bullish Targets In 10s & Futures Remain Untouched
Although the intraday bid in gilts has extended further, with equities and oil edging lower in recent trade, we note that the uptrend in 10-Year gilt yields drawn of the Dec ’21 lows remains intact (4.417% today). The benchmark last trades ~6bp lower at 4.457%.
- Meanwhile, futures hold comfortably below next resistance at the May 2 high (93.93), peaking at 93.42 today.
- Cross-market cues and correlations continue to outweigh domestic fundamentals at this stage.
- Although local factors are set to continue to provide sporadic influence when the UK’s delicate fiscal situation comes under scrutiny.
- A reminder that official bodies, namely the DMO and BoE, have become more activist when it comes to skewing supply away from the long end of the curve in recent weeks, which has provided some background support for long end UK paper, allowing major curves to pull back from cycle highs.
Fig. 1: UK 10-Year Gilt Yield (%)
Source: MNI - Market News/Bloomberg
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STIR: Tariffs Pull Near-term ESTR Curve Lower; M/T Curve Still Steeper On Fiscal
With global markets settling after a volatile ~60 minutes of (erroneous) headline-driven trading, ECB implied rates remain off session lows alongside core EGB yields. The 1y1y ESTR swap rate is nonetheless still on track for its lowest close since December 11, 2024, currently at 1.71%. That’s down from a close of 1.90% at last Wednesday's close (i.e. before the "Liberation Day" announcement), and also well below the 1.83% seen on February 28 (i.e. before the German defence/infrastructure announcement).
- The imposition of US tariffs – alongside the policy uncertainty that has built up over the past few months – is expected to weigh on regional demand and therefore contain inflationary pressures in the near-term.
- Additional disinflationary channels stem from the possible diversion of Chinese goods to the EU in response to US tariffs (note: EU officials are currently considering whether to implement measures to protect EU businesses against such dynamics) and a weaker energy price outlook on the back of lower global demand and an unwinding of OPEC+ supply cuts.
- 1- and 2-year EUR inflation swaps are on track to close at their lowest since mid-2021, even as Brent crude and natural gas futures drift away from early lows through the course of today’s session.
- However, on a 3-5-year horizon, the ESTR forward curve still sits steeper than at the end of February. This likely reflects the positive growth and inflation impulse from increased German/EU fiscal spending, possibly alongside the medium-term inflationary impact of tariffs assuming the EU retaliates.
US TSY FUTURES: BLOCK: Jun'25 10Y Sale
- -5,269 TYM5 112-10, sell through 112-11.5 post time bid at 1048:04ET, DV01 $335,000. The 10Y contract trades 112-07 last (-27).
EGBS: Bund Futures More Than Reverse Erroneous Headline-Driven Sell-off
Bund futures have more than reversed the sell-off attributed to an erroneous rumour that US President Trump was considering 3-month delay to tariffs on countries excluding China. That leaves futures -27 ticks lower today at 130.25, having briefly traded as low as 129.11.
- Price action over the past ~45 minutes underscores the highly sensitive nature of global markets to ongoing US tariff developments. Where the tariffs themselves and any retaliation from trading partners ultimately land will be key to central bank and fiscal policy outlooks.
- The 20-day EMA at 129.02 has contained downside in Bund futures intraday, and this level remains a key short-term support.
- On the topside, Friday’s high at 131.48 presents initial resistance.
- The German curve has twist steepened on the session, with Schatz yields down 5.5bps owing to dovish repricing in ECB rate cut expectations. 30-year Bund yields are up 3.5bps, dragged higher by long-end USTs.
- 10-year EGB spreads to Bunds have moved away from earlier highs during the course of the session. The BTP/Bund spread is 5.5bps wider at 124.5bps, dow from a high of over 130bps earlier).
