SOFR: Short Setting Dominated In Futures On Tuesday

German yields are down 1.5-2.5bps today, taking cues from UST and JGB counterparts. There was little net reaction to the slightly disappointing German December IFO survey. The belly of the curve outperforms, with 5-year yields down 2.3bps at 2.479% after testing trendline resistance drawn from the September 2023 high on Friday (see chart).

• 10-year yields hover just below 2.90%, also down 2.5bps on the session.
• Bund futures are +17 ticks at 127.77, with cumulative volumes a little below last week’s levels for this time of day.  The pullback from the Jan 19 high and the clear break of 127.90 (Jan 9 low) strengthens a reversal threat. Initial support is Friday’s low at 127.51 and the Jan 6 low at 127.13.
• 10-year EGB spreads to Bunds are biased narrower, with OATs outperforming as domestic political risk premium continues to be unwound. The 10-year OAT/Bund spread Is 1bp tighter at 57.5bps, a one-and-a-half year low.
• Germany's IFO Business Climate Index was unchanged in January after two consecutive falls, at 87.6 (88.2 consensus). The expectations component deteriorated marginally to 89.5 (90.3 cons; 89.7 prior), while the current assessment was slightly stronger this time at 85.7 (vs 86.0 cons; 85.6 prior).
• The EU sold E6.421bln of 5/10/15-year EU-bonds this morning.
• ECB’s Nagel and Kocher are scheduled to speak later today, while the North American macro calendar is relatively light. 

Figure 1: 5-year German Yields Since 2023 (Source: Bloomberg Finance L.P)

{GB} GILTS: Gilts have roughly stuck to the ranges established shortly after the open, with yields lower on global cues (Tsy rally stemming from Rick Rieder reportedly becoming frontrunner in the Fed Chair race, downticks in long end JGB yields and ongoing geopolitical risks).

• Locally, the weekend saw the Labour NEC block Mayor of Manchester Andy Burnham’s application to run in a by-election. The market had already unwound the brief bout of ‘PM Burnham risk’ that was priced in last week. Still, there may be some background demand for UK paper on the news.
• Gilt futures +12 at 91.39 vs. highs of 91.56.
• Last week’s price action undermined a bullish technical theme. Trendline support drawn off the Nov 19 low (91.12 today) was pierced. Bears will look for a more meaningful move below there before targeting the Jan 2 low (90.70). Conversely, initial resistance is located at the Jan 22 high (92.13).
• Yields 1.5-3.5bp lower, curve flatter.
• 10s back below 4.50%, leaving early January highs (4.538%) untested at this stage. Triangle pattern formed, with boundaries at 4.346% & 4.513% today.
• On the supply front, the BoE will sell GBP675mln of long bucket gilts from its APF holdings this afternoon, while the DMO will auction GBP3.25bln of the 4.125% Mar-33 gilt tomorrow and tender GBP1.25bln of the 0.125% Jan-28 line on Thursday.
• SONIA futures -0.5 to +1.5, strip flattens. BoE-dated OIS pricing ~38bp of easing for the current cycle, after hawkish comments from BoE’s Greene and firm inflation PMI subcomponents factored in late last week.