GILTS: Off Highs Alongside Peers & After Soft Long End Tender

Moves in long-end JGBs have provided the main impetus for global FI this morning, helping the German and UK curves flatten. German paper outperforms Gilts across the curve though, leaning bull flatter with yields -0.5 to -4bps lower. The Gilt curve has twist flattened, with 2-year yields up 3bps and 30-year yields down 4bps.

• French flash May inflation was much softer-than-expected at 0.6% Y/Y (vs 0.9% cons and prior), which is supporting outperformance at the EUR short-end relative to GBP.
• 30-year Gilt yields were 8bps lower at one point this morning, temporarily finding support from an FT interview with the DMO head. Pulay noted that “there has been an important shift in the relative proportions [of short/long-end Gilts to be issued] this year”, owing to the “declining strength” of demand for longer-dated paper. 
• Bund futures are +23 ticks at 130.96, off session highs of 131.22. Gilts opened at a high of 91.89, but have since eased back to 91.36 (+36 ticks today). Rolls are dominating volume in Gilts today, with U5 expected to become the front contract from tomorrow.
• 10-year EGB spreads to Bunds are mixed, with peripherals leaning slightly wider but semi-core bonds little changed to a touch tighter.
• BTP Short Term / BTPei results were digested smoothly, while the Netherlands sold 5-year DSLs this morning. The new 7-year BTP Italia is on offer for retail investors between today and Thursday.
• Eurozone economic confidence was slightly better-than-expected at 94.8 (vs 94.1 cons, 93.8 prior).
• Overnight, the UK May BRC shop price index was in line with consensus at -0.1% Y/Y (vs -0.1% prior).  The CBI distributive trades survey is due at 1100BST.

• Global bond markets and the shape of yield curves remain the key driver for currencies, as renewed volatility in the JGB market triggers a slump in the JPY and a broad USD rally. According to sources, the Japanese Ministry of Finance solicited market opinions on the curve and the government's issuance approach via a questionnaire - triggering broad speculation that the government would re-orient away from longer-end issuance.
• The ensuing bull-flattening of the Japanese curve worked against the JPY, boosting USD/JPY by over 1.3% off the overnight low, and well within range of the Y144.00 handle. A close at current or higher levels for the pair would snap the short-term downtrend that had reversed the pair off the Y148.65 mid-May high. The initial resistance zone at 144.40, last Thursday’s high and the 20-day EMA. Above here, the 50-day EMA currently intersects at 145.73.
• EUR losses posted off the back of a lower-than-expected French CPI miss are holding, with a new pullback low at 1.1341, dipping the price below the Friday close - and reversing the entirety of the gains posted off the Trump EU tariff threat delay from yesterday. USD strength is also playing a part here - dollar's rallying alongside equities as the inverse relationship between yields and the currency continues - with strong USD/JPY demand adding an extra tailwind.
• Technically, EUR/USD sees scant support until 1.1271, the 20-day EMA, meaning today's dip lower is counter-trend. But a clear break below here would highlight a stronger reversal and signal scope for a deeper retracement. EUR/GBP meanwhile is testing major support at the 200-dma of 0.8383. This level was briefly pierced intraday last week, but hasn't sustained a break below since March earlier this year. Weakness through 0.8380 would result in the lowest print since April 3rd.
• Focus for markets Tuesday rests on prelim durable goods orders and May consumer confidence from the US. Fed's Barkin and ECB's Nagel make up the Fedspeak. 

• The greenback trades on a firmer footing on Tuesday alongside the step lower for long-end core yields and the prevailing optimism for major equity benchmarks. As noted, long-end JGBs are outperforming after Reuters sources suggested the MOF will consider skewing the composition of its current issuance programme away from super-long-end instruments.
• This dynamic has helped USDJPY extend its intra-day recovery to around 1.25% on the session, narrowing the gap to the initial resistance zone at 144.40, last Thursday’s high and the 20-day EMA. Above here, the 50-day EMA currently intersects at 145.73.
• Overall, USDJPY maintains a softer tone and the pair has traded to a fresh short-term cycle low today. Support at 142.36 has been pierced, and a clear break of it would open 139.89, the Apr 22 low and the next key support. We wrote a detailed technical note on the significance of this medium-term pivot: https://mni.marketnews.com/3HsU8xu
• Speaking this morning at the 2025 BOJ-IMES Conference, Governor Ueda said “we have managed to de-anchor expectations from zero, but have yet to re-anchor them at 2%. This is why we are still maintaining an accommodative policy stance." Emphasising this caution, Finance Minister Katsunobu Kato indicated the MOF will monitor developments in the bond market, including super-long bonds, and maintain close communication with market participants to ensure appropriate bond management.