BONDS: Bund Futures Drift Lower But Support Intact; Gilt/Bund Spread Tightens
Bund futures have drifted lower through the morning, currently -6 ticks at 129.08. Support is not seen until the 20-day EMA at 128.63. Headline flow has been relatively light, with markets awaiting the ECB decision (1315BST) and US CPI report (1330BST). A reminder that the ECB deposit rate is fully expected to be held at 2.00%, with Lagarde likely to stress policy is still in "a good place".
- 10-year Bund yields are +1.3bps at 2.665%, but remain comfortably within yesterday’s range. More importantly, benchmark yields have traded between 2.60% and 2.80% since late July.
- While the German curve leans bear flatter, semi-core/peripheral curves have twist flattened.
- Ireland has held its only auction of the quarter (and potentially its final auction of the year). While the 10-year IRISH/Bund spread was 0.5bps wider at 23bps heading into the 1000BST bidding deadline, it has since tightened back to 21.5bps.
- Short-end Italian supply was also digested smoothly, with the 10-year BTP/Bund spread inching below 80bps in recent trade (-1.5bps today).
- Gilt futures hold onto the recovery from early session lows. The initial move lower seemed to be linked to moves in wider core global FI markets. Futures last +11 at 91.44. Initial support and resistance at 90.65 & 91.66, respectively. Corrective bullish cycle in the contract remains intact.
- UK yields 0.5bp lower to 2bp higher, curve flatter. 2s10s and 5s30s more than 10bp off highs registered last week. Note that the 10-year Gilt/Bund spread is just over 1bp tighter at ~196.5bps.
- SONIA futures 0.5 lower to 1.0 higher, BoE-dated OIS showing ~9bp of easing through year-end.
- The short 7-Year PGT saw decent demand, with the DMO set to come to market with GBP1.25bln of the 0.50% Jan-29 gilt later this morning.
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BONDS: 10-year Gilt/Bund Spread Wider Following UK Jobs Data
The 10-year Gilt/Bund spread is 2.5bps wider at 189bps, off earlier highs of above 190bps. This morning’s UK labour market data, which saw some stronger-than-expected elements including LFS employment growth, has been the primary driver of the widening. The remainder of today’s UK/EZ calendar is light, with main macro focus on this afternoon’s US CPI report. This report, alongside any major headline flow, should dictate moves in EGBs and Gilts for the remainder of the session.
- 10-year Gilt yields are up 2.2bps at 4.59%, off earlier highs of 4.61%.
- Today’s 5-year Gilt auction saw decent demand, which helped yields further away from session highs. The curve continues to lightly bear steepen on the session.
- 10-year Bund yields are little changed at 2.69%, close to session lows after the August German ZEW survey was a little weaker than expected.
- Bund futures volumes are once again on the soft side, while Gilt volumes fare a little better owing to the morning data and auction. Bund futures are +1 ticks at 129.63, with Gilts -23 ticks at 92.03.
GERMAN DATA: ZEW Underperforms In August
The German ZEW expectations index underperformed in August, falling from 52.7 to 34.7, below consensus of 39.5. The current conditions index meanwhile was also a little weaker than expected as it deteriorated from -59.5 to -68.6 (consensus -67.0).
- Wider sentiment continues to be on an overall uptrend in Germany, with the IFO business climate at a 14-month high, the manufacturing PMI at its joint highest of the 24-month publication window in August and the services PMI at a less significant 4-month high.
- However, as noted earlier, the Bundesbank weekly activity index remains on the soft side, which somewhat more closely tallies with the weaker ZEW current assessment index.
- "182 analysts participated in the August-survey which was conducted during the period 4.8.2025 - 11.8.2025."
- A reminder that the ZEW index is based on a survey of "experts from banks, insurance companies and financial departments of selected corporations [which] have been interviewed about their assessments and forecasts for important international financial market data". It can exhibit elevated levels of correlation with German stock indices such as the DAX.
JGBS: 10-year Bond Untraded All Day, First Time Since March '23 (Via BBG)
"*JAPAN 10Y BOND UNTRADED ALL DAY FOR FIRST TIME SINCE MARCH 2023" Bloomberg
Bloomberg write: "Activity in the bond market was crimped by a local holiday and ahead of the scheduled release of the closely watched US consumer price index later in the day. No trades of the newly issued 10-year note were seen on Tuesday on Japan Bond Trading Co., which acts as an intermediary for transactions between financial institutions."
Long-end JGB liquidity remains a key concern. While 10- and 30-year JGB yields are off recent cycle highs,, Bloomberg's Japanese Govt liquidity index continues to rise (indicating worse liquidity).
