GILTS: Curve Bear Flattens After Initial Rally Fades

• The early rally in Bund futures has faded, leaving RXU5 +5 ticks at 129.78. Volumes are light, with no regional data released this morning and weekend news around US-Russia talks having little net impact. While the contract moved back below the 130.00 handle of Friday, the bear trigger and notable support at 128.84 (July 25 low) was not tested.
• German yields are up to 1bp lower across the curve. The 10-year yield is at 2.68%, with the 2.70% handle the initial focus if upside momentum takes hold once again. This level held on Friday.
• A reminder that this week’s EGB net cash flow backdrop is favourable, with estimated net supply for the week strongly negative at negative E43.8bln, versus positive E23.5bln last week. Finland holds an auction tomorrow, with Germany selling 10-year Bunds on Wednesday.
• 10-year EGB spreads to Bunds are little changed. The BTP/Bund spread is attempting to consolidate below the 80bp handle, with a pullback in EUR vol metrics an important driver of narrowing since tariff uncertainty peaked in April.  
• Today’s US data calendar is also light, leaving any major market moves likely to be dictated by headline flow.

Gilts have edged away from early session highs.

• Initial focus fell on this week’s Trump-Putin meeting and related hope surrounding a Russia-Ukraine ceasefire, which would potentially provide a deflationary/disinflationary impulse.
• That was before a more sanguine market view on the potential for any such deal, owing to ongoing differences between the Russian & Ukrainian pre-requisites, pushed equities off session highs (which also proved to be bond supportive).
• Futures topped out at 92.37 and last trade +29 at 92.25.
• Initial resistance of note located at the August 5 high (92.84). Bulls look to regain momentum after a close below the 20-day EMA.
• Yields ~4bp lower across the curve, early flattening impulse eases.
• 2s and 10s move back into the lower half of the ranges witnessed since early June, 2s last 3.86%, 10s last 4.56%.
• 2s10s and 5s30s continue to trade around 70bp & 140bp, respectively.
• SONIA futures flat to +4.0.
• BoE-dated OIS pricing 18bp of easing through year-end and 28bp through February (vs. 17bp & 27bp ahead of the gilt open), with the rally further out the curve and a soft REC report on jobs providing a modest dovish impulse.
• Little of note on the UK calendar today, with tomorrow’s labour market report headlining the weekly schedule. Click for our full preview of that event: https://media.marketnews.com/UK_Labour_Preview_2025_08_Release_c044b96ee8.pdf

Goldman Sachs note that while the BoE’s QT decision is yet to come, “MPR analysis reinforces the view that the BoE is becoming increasingly attuned to risk of market dysfunction and points to a reduction in the QT pace ahead. Against this, the long-end curve has been well insulated from hawkish policy impulses”. They continue to “expect 10-Year gilt yields to decline over time, to 4.25% by year-end”.