BONDS: EGBs-GILTS CASH CLOSE: OATs Shrug Off French Gov't Collapse
EGBs and Gilts resumed the rally that began late last week, with bull flattening seen across curves Monday.
- Core instruments got off to a steady start, largely looking through weekend Japanese political headlines (JGB curve twist steepened overnight after LDP leader Ishiba resigned).
- But the recent rally (helped by Friday's weak US employment data) soon resumed, with limited data / macro headlines to get in the way. 10Y Gilt yields fell to the lowest since Aug 14; Bund Aug 8.
- After the cash close, French PM Bayrou lost a confidence vote in parliament that triggered his resignation, with President Macron now set to name his replacement within days.
- This chain of events was entirely expected and there was no discernable reaction in OAT futures, indeed French spreads tightened on the day.
- In data, German industrial production was slightly stronger than expected.
- Gilts slightly outperformed Bunds on the day, with both curves bull flattening. Periphery/semi-core EGB spreads tightened, with OATs among the outperformers.
- We get some 2nd tier data Tuesday (including arious national-level Eurozone industrial production figures), with the week's European focus being Thursday's ECB decision - MNI's preview will be published Tuesday.
Closing Yields / 10-Yr EGB Spreads To Germany
- Germany: The 2-Yr yield is down 0.3bps at 1.926%, 5-Yr is down 1bps at 2.209%, 10-Yr is down 2bps at 2.642%, and 30-Yr is down 3.3bps at 3.264%.
- UK: The 2-Yr yield is down 0.7bps at 3.903%, 5-Yr is down 2.5bps at 4.023%, 10-Yr is down 4.1bps at 4.605%, and 30-Yr is down 4.5bps at 5.459%.
- Italian BTP spread down 1.3bps at 82.9bps / French OAT spread down 2bps at 76.6bps
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AUSSIE 10-YEAR TECHS: (U5) Recovers With Treasuries
- RES 3: 96.501 - 76.4% of the Mar 14 - Nov 1 ‘23 bear leg
- RES 2: 96.207 - 61.8% of the Mar 14 - Nov 1 ‘23 bear leg
- RES 1: 95.960 - High Apr 7
- PRICE: 95.710 @ 14:34 BST Aug 8
- SUP 1: 95.415/95.300 - Low May 15 / Low Jan 14
- SUP 2: 95.275 - Low Nov 14 (cont) and a key support
- SUP 3: 94.707 - 1.0% 10-dma envelope
Aussie 10-yr futures received a boost from the US Treasury rally that followed a poor NFP print. This keeps Aussie 10-year futures toward the top end of the recent range. To the upside, next resistance is at 96.207, a Fibonacci retracement point. Next support undercuts at 95.420 (pierced), the Feb 13 low, ahead of 95.275, the Nov 14 low and a key support. Clearance of this level would strengthen a bearish condition.
SECURITY: Trump To Sign Trilateral Peace Accord With Armenia/Azerbaijan Shortly
US President Donald Trump is shortly due to sign a trilateral peace agreement with Armenian Prime Minister Nikol Pashinyan and Azerbaijani President Ilham Aliyev at the White House. LIVESTREAM The event will provide another opportunity for Trump to style himself as peacemaker, after touting success in brokering peace deals between Rwanda/Congo, Cambodia/Thailand, and India/Pakistan.
- The accord aims to resolve a decade-long dispute over the sovereignty of Nagorno-Karabakh - a breakaway Azerbaijani province that was under de facto Armenian control from the dissolution of the Soviet Union until a 2020 war.
- Trump described the meeting on Truth Social as a “historic peace summit,” noting that the US will also sign “Bilateral Agreements [to] fully unlock the potential of the South Caucasus Region.”
- White House spokeswoman Anna Kelly told reporters that Trump would sign deals with both Armenia and Azerbaijan on energy, technology, economic cooperation, border security, infrastructure and trade.
- A White House official said: "It's about the entire region, and [the leaders] know that that region is known to be safer and more prosperous with President Trump."
- Reuters reports that the US will have development rights to build transportation links in the strategic Zangezur Corridor, a mountainous stretch of Armenian territory between Azerbaijan and its Nakhichevan exclave.
- Politico notes: “But whether this is just a photo opportunity or a lasting end to a conflict that has undermined stability in a region dominated by Russia and Iran will depend on whether the US can address several key challenges.”
FED: Balance Sheet Runoff Continues At Steady $20B/Month Pace (2/2)
Fed asset holdings were little changed in the past week. SOMA runoff totaled $2.8B (composed of $4.2B less nominal Tsy holdings and $1.4B more TIPS), with emergency lending/liquidity facilities $0.7B lower.
- Over the last 4 weeks, the $20B/monthly expected QT pace was roughly adhered to: MBS fell $18B, with Treasury net holdings down around $2B (a fall in TIPS holdings offsetting a slight rise in nominals).
- Discount window usage accounted for the fall in lending facility usage this week; takeup is now down to $4.9B, down $1.3B in the last month and down from the 1-year high of $6.4B set in July which looks to have been a temporary blip higher.
