ECB: Schnabel Provides Familiarly Hawkish Tone

• The DMO will return to the market this morning to hold a 10-year gilt auction of the 4.50% Mar-35 gilt for GBP4.25bln.
• This will be the fourth auction of the gilt (following its syndicated launch in February).
• The size on offer matches that seen in the 14 May auction but is slightly larger than the GBP4.00bln on offer in both March and April.
• 10-year demand has remained relatively strong with bid-to-covers ranging from 2.85x-3.13x across the three auctions and tails have been between 0.3-0.5bp. However, the lowest accepted price at the May auction saw a lower price than the pre-auction secondary mid-price.
• The 4.50% Mar-35 gilt is scheduled to be reopened again on 9 July and 5 August before a medium-dated syndication will be held in September (we pencil in 2/3 September with a new 10-year gilt likely).
• Timing: Results will be available shortly after the bidding window closes at 10:00BST with a further GBP1.0625bln availble to successful bidders via the PAOF.

Gilts trade lower, weakness in peers factors in, as does the presence of this morning’s 10-Year supply.

• Futures stick within yesterday’s range after bulls forced the contract through a cluster of resistance levels on Tuesday, as the bullish cycle extended.
• Lows of 92.45 seen so far.
• Yesterday’s high (92.87) presents the initial resistance point.
• To the downside, bears will want to close yesterday’s opening gap higher (92.00).
• Yields 2-3bp higher, bear steepening after yesterday’s labour market data-driven bull steepening.
• 10-Year yields remain above long-term uptrend support drawn of the Dec ’21 lows (4.522% today).
• 30-Year yields closed below long-term uptrend support drawn off their own Dec ’21 lows yesterday (a redrawn support line to account for yesterday’s move comes in at 5.242% today).
• The aforementioned 10-Year gilt supply (GBP4.25bln of the 4.50% Mar-35 gilt) will be eyed this morning, before Chancellor Reeves present’s the government’s spending review this afternoon.
• The spending review will not set any new overall fiscal spending limits
• Our comments on the matter are available in our latest Gilt Week Ahead piece.
• We have highlighted political risks for both Chancellor Reeves and PM Starmer. Our political risk team’s preview is available here.

• Some early small widening in the spreads versus the German 10yr, most of the developed countries sits wider, the BTP/Bund spread is still finding support ahead of the big initial 90.00bps level.
• But worth Watching how the Tnotes/Bund spread develops from here, the ~195.73bps level has provided some decent resistance, which also coincide with the 76.4% retracement of the February/April range at ~196.3bps.

(Chart source: Bloomberg Finance LP/MNI).