BONDS: EGBs-GILTS CASH CLOSE: Bund Rally Pauses For Breath
Jan-08 18:15
Core EGB yields rose Thursday for the first session this week, with Gilts outperforming Bunds and Eurozone periphery spreads tightening.
- Most of the session appeared characterized by consolidation within the prior session's trading sessions after the recent rally, with little in the way of morning macro/headline drivers.
- German factory orders beat expectations and Italian unemployment hit a new low but these weren't market movers.
- Instead, heavy corporate and sovereign supply weighed in particular on EGBs early, with issuance from Spain, France, Italy, and Portugal.
- After yields edged to session highs following mixed US data in early afternoon, there was a solid pullback in yields late in the session into the close as after the supply digestion window closed.
- The Gilt curve maintained its ongoing rally, twist steepening with the short end easily outperforming, while the German curve bear steepened.
- Periphery/semi-core EGB spreads tightened, led by BTPs.
- Friday's global focus will be the US employment report, while in Europe we get national-level industrial production data (including France and Germany) and an appearance by ECB's Lane.
Closing Yields / 10-Yr EGB Spreads To Germany
- Germany: The 2-Yr yield is up 0.5bps at 2.095%, 5-Yr is up 1.3bps at 2.411%, 10-Yr is up 1.3bps at 2.863%, and 30-Yr is up 2.1bps at 3.468%.
- UK: The 2-Yr yield is down 2.3bps at 3.656%, 5-Yr is down 0.8bps at 3.853%, 10-Yr is down 1.2bps at 4.404%, and 30-Yr is up 0.2bps at 5.159%.
- Italian BTP spread down 1.9bps at 64.6bps / French OAT down 0.7bps at 66.6bps
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MACRO ANALYSIS: US Macro Developments Since The Last FOMC Decision
Dec-09 2025 18:12
The government shutdown may have concluded but the knock-on effects still cast a long shadow on data updates. The most consequential release since the last FOMC meeting was the September nonfarm payrolls report with surprisingly strong payrolls growth but more notably another push higher in the unemployment rate. GDP tracking meanwhile remains particularly robust in Q3 and into Q4 as well (the latter using more anecdotal evidence) but Q3 BEA data will only be released on Dec 23. Inflation data have also been lacking, only receiving September updates for PPI and PCE inflation since the last meeting. They suggest a high likelihood the FOMC will undershoot its 4Q25 core inflation forecast but equally it’s at a still elevated rate and sees stubbornly high services inflation.
- Labor Market: Higher Unemployment Rate Causes Worry On FOMC
- Growth: Robust GDP Tracking But Still In The Dark On Official Data
- Inflation: In The Dark But Core PCE Likely Softer Than FOMC Forecast
FOREX: USD Index Modestly Higher Pre-Fed, AUDJPY Extends Sharp Upswing
Dec-09 2025 18:07
- The USD index has mirrored a turbulent session for US yields, and tilts moderately higher as we approach the APAC crossover. The main boost for the USD index came after the stronger-than-expected double release of US JOLTS data, painting a better picture of the US labour market.
- The next key driver for the greenback will be tomorrow's FOMC, with more attention than usual on the Statement to see how resolutely the easing bias remains. Forward guidance is likely to be amended to reflect a more patient stance on cuts. As such the market reaction to the meeting could hinge on how Chair Powell portrays the burden of proof for further easing ahead.
- Clearer direction was seen elsewhere in G10 FX, with AUD and SEK clear outperformers, while the Japanese yen struggled once more.
- AUD has been primarily driven by a hawkish RBA, following its decision to hold rates at 3.6% and the balance of risks now tilted toward a potential hike next year to contain inflationary pressures. AUDUSD briefly rose to a fresh recovery high at 0.6654, keeping bullish conditions firmly intact. 0.6707 remains the key AUDUSD resistance, the Sep 17 high.
- Downward pressure on the JPY continues to be in focus this week, amid the hawkish repricing for core fixed income markets and regional geopolitical uncertainty taking its toll. Combining this with a firm risk backdrop (major equity indices maintaining a stable tone towards recent highs), Cross/JPY has been a notable beneficiary of the overall dynamics. AUDJPY briefly extended gains to over 1% on the session, printing a high of 104.40.
- In emerging markets, the Mexican peso is performing relatively well today, maintaining its resilient profile of late. Above expectation inflation data has prompted a hawkish repricing across the TIIE-F swaps curve, as the market assesses a potential imminent turning point for Mexican monetary policy.
US TSYS/SUPPLY: Review 10Y Auction Re-Open: On-The-Screws
Dec-09 2025 18:05
- Treasury futures remain mixed, 2s-10s modestly weaker (TYH6 -1.5 at 112-06.5, yld 4.1683%) after the $39B 10Y note auction re-open (91282CPJ4) comes out on-the-screws: drawing 4.175% high yield vs. 4.175% WI; 2.55x bid-to-cover vs. 2.43x prior.
- Peripheral stats: indirect take-up to 70.24% vs. 67.00% prior; direct bidder take-up recedes to 20.96% from 22.55% prior; primary dealer take-up slips to 8.81% vs. 10.45% prior.
- The next 10Y auction is tentatively scheduled for January 12.
