US TSY FUTURES: Over $20mln Net DV01 Equivalent Added During Thursday’s Rally

Last night’s proposed German fiscal loosening continues to promote Bund underperformance vs. peers.

• The presence of the 30-Year German bond syndication adds further pressure to spreads.
• The 10-Year spread to UK paper is through the October 30 closing level (196.4bp), with clustered support seen just below at the Oct 25 close & 50% retracement of the July ’24 to Dec ’24 widening (194.2bp/194.1bp).

Fig. 1: 10-Year Gilt/Bund Spread (bp)

Source: MNI - Market News/Bloomberg

• The EUR surge this morning is extending the higher yields, higher currency Europe-oriented trade this week, putting EUR/USD again well clear to new YTD highs. The updated German fiscal plan provided the latest driver, infitting with the EU's rearmament plan outlined on Monday. Yesterday’s technical break of 1.0533 in EUR/USD was significant, and today’s impressive follow through has seen spot rise to a high of 1.0722, closing in on 1.0728, the Nov 11 high. Above here, technical levels of note reside at 1.0804 (retracement point) and 1.0825, the Nov 7 high.
• This has worked further against the USD. We wrote yesterday that EUR/USD trading ~1.0630 and above could trigger a test of key USD Index support at 105.178 - the 50% retracement of the Trump-tied rally off last year's lows. That level's under pressure this morning and a break below would a bearish technical signal for the greenback, and could draw further focus into Friday's payrolls.
• Outside off the EUR and USD, SEK is trading very well as a higher beta to European equities, while CAD is again coming under pressure from both heavy oil prices, and the doubling-down of tariff pressure from the US confirmed by Trump at the State of the Union address overnight.
• ISM services data will be carefully watched later today - particularly after the market-moving manufacturing release on Monday for any further signals of stagflationary pressure. Prices paid are seen unchanged at 60.4, although we saw a sizeable upside surprise on Monday (62.4 vs. Exp. 56.0) for manufacturing and the largest one-month gain since 1957 in the MNI Chicago PMI on Friday.
• BoE's Bailey, Pill, Greene and Taylor are set to speak later today in front of the Treasury Select Committe, but will likely stick to the key themes and messaging from the last Monetary Policy Report.

Gilt futures to fresh session lows of 92.05 in recent trade.

• The bullish short-term technical setup is at risk.
• Key short-term support at 91.79, the Feb 20 low.
• Yields 8-11bp higher across the curve, steepening seen.
• Increased odds of a more meaningful fiscal impulse out of Germany has driven a sell off in core global FI markets, along with swap spread narrowing.
• The UK/Germany10-Year yield spread is set to close below 200bp for the first time since October (more on that to follow).
• Suggestions that U.S. President Trump could moderate tariffs against both Mexico and Canada, as well as the presence of 5-Year gilt supply, provided further pressure.
• That was before 5-Year supply was well-received.
• Domestic headline flow has focused on the need for further fiscal spending cuts as Chancellor Reeves’ already limited fiscal headroom is eroded, although that had little market impact as fiscal headwinds are well documented.
• BoE-dated OIS prices 51.5bp of cuts through year-end vs. ~57bp late yesterday.
• 19bp priced through the May MPC and 24bp priced through June. We still look for a 25bp cut in May at this stage.
• SONIA futures flat to -16.0, strip steepens.
• Looking ahead, a Treasury Select Committee appearance from BoE’s Bailey, Pill, Taylor & Greene gets underway at 14:30 GMT.
• However, macro cues should continue to dominate.