ECB: Schnabel: Preference To Skew Structural Bond Portfolio Towards Short-end

Compressed EUR front-end rates volatility remains a theme, with recent data/political developments not enough to tempt ECB officials from deviating from the well-signalled “good place” stance. President Lagarde yesterday re-iterated the data dependent approach. The immediate fallout from French (ex-) PM Lecornu’s resignation yesterday sparked a fleeting ~2.5 tick rally in the likes of ERU6, but these moves quickly faded.

• It’s notable that the ESTR forward curve from the 1y1y point onwards is currently very similar to the April 2 close (i.e. just before Trump’s Liberation Day announcement). Markets have fully unwound the early April uptick in trade policy uncertainty, with focus now on the direct (rather than indirect) impacts of tariffs and the implementation of German fiscal stimulus.
• We think markets are justified in pricing in some implied probability of hikes over the coming years to account for increased fiscal stimulus, but believe that the risk of another cut still comfortably outweighs the risk of a hike (Chief Economist Lane explicitly said as much yesterday). It’s also historically been rare for the ECB to be hiking at the same time as a Fed cutting cycle, though the idiosyncratic nature of proposed German stimulus measures may caution too much reliance on past trends.
• ECB-dated OIS continue to price ~10bps of easing through the middle of next year. 

This morning, Germany will hold a Bobl auction. On offer will be E4.5bln of the 2.20% Oct-30 Bobl.

• The size is in line with the last re-open of this issue on September 16.
• Recent auctions in the German Bobl segment haven't seen particularly strong demand metrics but the segment arguably has fared better than others on the German curve when looking at bid-to-cover and bid-to-offer ratios. In 2025, Bobl auction bid-to-covers came in between 1.23x to 2.52x, and bid-to-offers between 0.95x to 1.91x, respective 1.93x / 1.47x ratios reached in the September 16 auction were towards the higher end of these ranges. Low prices have been above the secondary market mid-prices throughout 2025.
• The next German auction will be next tomorrow's 15-year auction with E1bln of the 2.60% May-41 Bund (ISIN: DE000BU2F009) and E1bln of the 3.25% Jul-42 Bund (ISIN: DE0001135432) on offer.
• The 2.20% Oct-30 Bobl will be reopened next on October 28.
• Timing: Results will be available shortly after the bidding window closes at 10:30BST / 11:30CET.

Gilts sell off on the global cues detailed in recent bullets covering weakness in wider core global FI markets before stabilising off lows.

• Futures respect yesterday’s low ta 90.41, last -20 at 90.45.
• Bears remain in technical control, with initial support and resistance still located at 90.26 & 91.28.
• Yields 0.5-2.0bp higher, curve steeper.
• 10s last ~4.75%, still operating within the multi-week 4.60-4.80% closing range.
• Light hawkish moves in GBP STIRs given moves further out the curve, SONIA futures flat to 2.0 lower, BoE-dated OIS pricing just under 5bp of easing through year-end.
• The DMO will sell GBP1.25bln of the 0.125% Jan-28 gilt via PGT this morning.
• Little else of note on the UK calendar.
• Fiscal matters continue to dominate domestic news flow.
• Former BoE MPC member Saunders told BBG that inflation will provide the government with a net GBP5bln of additional revenue, although that is hardly positive news for households.