BONDS: Solid Gilt Auction Helps UK Paper Lightly Outperform German Peers
The strong 20-year Gilt auction helps UK paper extend this morning’s light outperformance versus German peers. Gilt yields are now 0.5 to 1.5bps higher across the curve, compared to the 0.5 to 2.5bp rise in German yields. The 10-year tenor underperforms on the UK curve, while Germany sees a clearer bear steepening dynamic.
- That leaves the 10-year Gilt/Bund spread 1bp narrower at 195bps, still above the August 25 closing low of 193bps.
- The German 5s30s curve is 1bp steeper at 106.2bps, moving away from this month’s 104.8bp low.
- Bund futures have drifted lower through the morning, currently -24 ticks at 129.07. The 129.00 handle has contained intraday downside for now, with key support not seen till 128.25 (Sep 4 low).
- Gilt futures have moved up to 91.48 following the 20-year auction, still -7 ticks on the session and shy of yesterday’s 91.61 high.
- OAT futures (-6 ticks at 121.83) haven’t seen much reaction to ex-PM Bayrou’s expected ousting following yesterday’s no-confidence vote. President Macron will try and appoint a new PM in the coming days. Note that a roll in Bloomberg’s 10-year OAT benchmark (now the 3.50% Nov-35 OAT) has skewed the 10-year OAT/Bund spread up to above 80bps. Meanwhile, the benchmark 10-year BTP/OAT spread is now negative for the first time.
- Alongside the Gilt auction, the Netherlands and Austria have sold bonds today. German greens are due at 1030BST, with the EU also holding a dual tranche syndication.
- Today’s regional data (French July industrial production and UK BRC shop sales) were not market moving. Global focus turns to the US preliminary payrolls revisions at 1500BST.
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AUSSIE 10-YEAR TECHS: (U5) Recovers With Treasuries
- RES 3: 96.501 - 76.4% of the Mar 14 - Nov 1 ‘23 bear leg
- RES 2: 96.207 - 61.8% of the Mar 14 - Nov 1 ‘23 bear leg
- RES 1: 95.960 - High Apr 7
- PRICE: 95.710 @ 14:34 BST Aug 8
- SUP 1: 95.415/95.300 - Low May 15 / Low Jan 14
- SUP 2: 95.275 - Low Nov 14 (cont) and a key support
- SUP 3: 94.707 - 1.0% 10-dma envelope
Aussie 10-yr futures received a boost from the US Treasury rally that followed a poor NFP print. This keeps Aussie 10-year futures toward the top end of the recent range. To the upside, next resistance is at 96.207, a Fibonacci retracement point. Next support undercuts at 95.420 (pierced), the Feb 13 low, ahead of 95.275, the Nov 14 low and a key support. Clearance of this level would strengthen a bearish condition.
SECURITY: Trump To Sign Trilateral Peace Accord With Armenia/Azerbaijan Shortly
US President Donald Trump is shortly due to sign a trilateral peace agreement with Armenian Prime Minister Nikol Pashinyan and Azerbaijani President Ilham Aliyev at the White House. LIVESTREAM The event will provide another opportunity for Trump to style himself as peacemaker, after touting success in brokering peace deals between Rwanda/Congo, Cambodia/Thailand, and India/Pakistan.
- The accord aims to resolve a decade-long dispute over the sovereignty of Nagorno-Karabakh - a breakaway Azerbaijani province that was under de facto Armenian control from the dissolution of the Soviet Union until a 2020 war.
- Trump described the meeting on Truth Social as a “historic peace summit,” noting that the US will also sign “Bilateral Agreements [to] fully unlock the potential of the South Caucasus Region.”
- White House spokeswoman Anna Kelly told reporters that Trump would sign deals with both Armenia and Azerbaijan on energy, technology, economic cooperation, border security, infrastructure and trade.
- A White House official said: "It's about the entire region, and [the leaders] know that that region is known to be safer and more prosperous with President Trump."
- Reuters reports that the US will have development rights to build transportation links in the strategic Zangezur Corridor, a mountainous stretch of Armenian territory between Azerbaijan and its Nakhichevan exclave.
- Politico notes: “But whether this is just a photo opportunity or a lasting end to a conflict that has undermined stability in a region dominated by Russia and Iran will depend on whether the US can address several key challenges.”
FED: Balance Sheet Runoff Continues At Steady $20B/Month Pace (2/2)
Fed asset holdings were little changed in the past week. SOMA runoff totaled $2.8B (composed of $4.2B less nominal Tsy holdings and $1.4B more TIPS), with emergency lending/liquidity facilities $0.7B lower.
- Over the last 4 weeks, the $20B/monthly expected QT pace was roughly adhered to: MBS fell $18B, with Treasury net holdings down around $2B (a fall in TIPS holdings offsetting a slight rise in nominals).
- Discount window usage accounted for the fall in lending facility usage this week; takeup is now down to $4.9B, down $1.3B in the last month and down from the 1-year high of $6.4B set in July which looks to have been a temporary blip higher.
