EQUITIES: EU Bank stock option

European government bonds have rallied sharply this morning while equities push lower, marking a continuation of yesterday's broadly risk-off move.

• The combination of rising recessionary risks on the back of more aggressive monetary tightening and concerns over a fresh wave of Covid infections have underpinned the latest bout of risk aversion.
• Gilts rallied from the open with yields down 13-15bp on the day.
• Former Chancellor of the Exchequer Rishi Sunak has won backing from former cabinet ministers Dominic Raab and Grant Shapps in his bid to replace the outgoing UK prime minister.
• The bund curve has bull flattened. Cash yields are down 8-14bp while the 2s30s spread has narrowed 6bp.
• It is a similar story for OATs where the curve is 5bp flatter on the back of the long end outperforming.
• BTPs have firmed with yields 5-12bp lower on the day,.
• Supply this morning came from the UK (Gilt, GBP2.75bn) Germany (Schatz, EUR4.513bn allotted) Italy (BTOs, EUR7bn), Spain (Letras, EUR1.796bn) and Belgium (TCs, EUR3.005bn)

• Continued widening of the Tnote/Bund spread today, by another 5bps so far, and widest since the 23rd of May.
• Next upside target will be seen at 183.7bps (23/05/22 high), now trading at 179.6bps.

Chart source: MNI/Bloomberg

• Cash Tsys have seen a sizeable rally already today with the combination of China demand fears on rising Covid cases, both German and European ZEW financial analyst sentiment sliding and a further decline in the US NFIB small business survey in the only data of the day.
• The result has been the largest inversion in 2s10s inversion since 2007 at -8bps whilst the 3M to 10Y spread continues its slide, touching 74bp having been 120bp just at the start of July and 176bp at the start of June.
• 2YY -5.8bps at 3.014%, 5YY -6.8bps at 2.987%, 10YY -6.8bps at 2.924% and 30YY -5.0bps at 3.124%.
• TYU2 trades 16 ticks higher at 118-28 off an earlier high of 119-03 on solidly above average volumes. It stopped just show of resistance at 119-05 (Jul 7 high), clearance of which could open the bull trigger at 120-16+ (Jul 6 high).
• Fedspeak: Barkin (’24 voter) to discuss his speech on The Recession Question from Jun 21 with Q&A.
• Bond issuance: US Tsy $33B 10Y Note auction re-open (91282CEP2) – 1300ET
• Bill issuance: US Tsy $34B 52W bill auction – 1130ET

UST 2Y, and 10Y yields top panel, 2s10s and 3M to 10Y spreads bottom panel (showing last price and not ask price in text)Source: Bloomberg