BONDS: Pullback From Session Highs After Benefitting From Long End JGB Rally
May-23 09:35
Bonds pull back from session highs after the bid that was tied to a late Tokyo rally in the Japanese long end falters.
- ECB negotiated wage data was a touch softer than the loose consensus from the sell-side reports that we read (+2.4% Y/Y vs. +2.5-2.7%).
- This, coupled with some weakness in equities, has allowed bonds to stabilise after the pullback from highs.
- Bund futures trade in the middle of their range at 130.05, key support at 129.13 untested, with resistance located at 130.75. The early May pullback in the contract appears corrective.
- German curve flatter, yields little changed to -2.5bp. 5s30s back to 95bp after registering a fresh cycle high at 99.2bp yesterday.
- Less dovish than usual comments from ECB’s Stournaras provided some modest weight to the front end of the curve/EUR STIRs early today.
- EGB spreads to Bunds little changed.
- Focus continues to fall on the 10-Year BTP/Bund spread, which hovers around 100bp, with moves below remaining limited at this stage. We have previously argued that sustained moves below 100bp likely require more meaningful progress in EU-U.S. trade talks. We also noted that positive action from Moody's at this evening’s scheduled rating review of Italy could also provide a catalyst for further narrowing.
- Gilt futures +20 or so at 90.65, sticking within the pre-existing weekly range.
- Yields +1.5bp to -2.5bp, front end weigh by strong UK retail sales data, while the long end benefits from cross-market inputs detailed above.
- Lower tier U.S. data and Fedspeak is due in NY hours, with little scheduled Eurozone/UK event risk evident during the remainder of the session.
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GILTS: Twist Flattening Holds, BoE Comments Eyed
Apr-23 09:33
Twist flattening has dominated on the gilt curve this morning, with 3 factors defining this morning’s price action:
- Spillover from Tsys after U.S. President Trump pushed back against the idea that he was looking to fire Fed Chair Powell, as well as some comments pointing to the potential for a moderation in the Sino-U.S. trade war.
- The DMO’s revised gilt remit surprising most by coming in marginally lower than the prior estimate, skewing issuance further away from the long end in the process (T-bill, short-dated and unallocated bucket issuance was revised higher, while long-end issuance was revised lower).
- Softer-than expected flash PMIs.
- Gilt futures broke through initial resistance at the open, with bulls now looking to pierce 93.00 before shifting focus to a Fibonacci retracement at 93.44. The contract last prints 92.80 vs. session highs of 92.95.
- Yields 3.5bp higher to 9bp lower.
- 2s10s ~13bp off cycle closing highs, last ~65.6bp.
- 5s30s ~11bp off yesterday’s cycle closing high, last 127.8bp.
- BoE-dated OIS covering ’25 meetings back to little changed on the day, showing 92bp of cuts through year-end, with the next 25bp step still fully discounted through the May meeting. Recent range extremes of ~97bp of cuts through year-end remains untested/intact.
- Comments from BoE’s Pill (11:30 BST), Bailey (18:15 BST) & Breeden (19:00 BST) due throughout the day.
GERMAN AUCTION RESULTS: 2.50% Feb-35 Bund
Apr-23 09:31
| 2.50% Feb-35 Bund | Previous | |
| ISIN | DE000BU2Z049 | |
| Total sold | E4bln | E4.5bln |
| Allotted | E3.049bln | E3.42bln |
| Avg yield | 2.47% | 2.68% |
| Bid-to-offer | 1.06x | 1.64x |
| Bid-to-cover | 1.38x | 2.16x |
| Avg Price | 100.25 | 98.45 |
| Low Price | 100.23 | 98.43 |
| Pre-auction mid | 100.230 | 98.434 |
| Previous date | 02-Apr-25 |
PORTUGAL: Gov't To Ask EU To Activate SGP Escape Clause As Election Looms
Apr-23 09:30
The caretaker gov't of PM Luis Montenegro is set to ask the European Commission to activate the 'fiscal escape clause' from the Stability and Growth Pact that will allow Lisbon to boost defence spending by the equivalent of up to 1.5% of GDP. The new rule allows a country to increase its defence spending by 1.5% of GDP each year for four years without incurring the Excessive Deficit Procedure that would usually come into force for breaching SGP rules.
- The announcement comes after neighbouring Spain confirmed plans to accelerate its move towards NATO's (current) 2% of GDP floor on defence spending. Portugal's estimated spending on defence in 2024 came in at 1.55% of GDP.
- Montenegro's centre-right Democratic Alliance (AD) administration confirmed that it had contacted and gained approval from the main opposition centre-left Socialist Party (PS) ahead of the announcement, indicating that the outcome of the 18 May legislative election will not result in a change in position from the Portuguese gov't on activating the escape clause.
- Opinion polling shows very little change from the previous election in March 2024, with the AD retaining a narrow lead over the PS, but with neither party looking set for a majority. Notable focus post-election will be on whether the AD looks to work again with the PS, or swings to the right and brings the nationalist Chega into gov't.
Chart 1. Legislative Election Opinion Polling, % and 5-Poll Moving Average
Source: Intercampus, Aximage, Consulmark, Pitagorica, CESOP-UCP, ICS/ISCTE, MNI
