SCHATZ: Swap related trade

• The underperformance in Bund Futures initially led by the longer end Germany and US Treasuries, has now moved the BTP/Bund spread from a small 0.6bp wider, to 0.6bp tighter.
• As noted this Week, it is worth watching how the spread develops, as risk remains to the downside.
• Further tightening bias would target the Psychological 90.00bps level, printed a 90.4bps low in 2021, its lowest since Mid March 2015.
• Barclays last Week, provided a new punchy forecast after moving their call from 90bps down to 70bps.
• Goldman are also seeing potential tightening risks, without providing a target level.
• Bund just tested the initial support noted at 130.94, printed a 130.94 just now, and below the latter, opens back to 130.72.

Gilts hold lower, with weakness in core global FI (given renewed focus/reports surrounding German fiscal easing and a rally in European equity benchmarks) spilling over.

• Futures -44 at 91.48, filling yesterday’s opening gap higher.
• The recent gains in the contract have allowed short-term oversold conditions to unwind, with the uptick considered corrective from a technical perspective.
• Initial support and resistance located at 91.16/92.11.
• Yields 1-3bp higher, 10s lead the sell off.
• 10s stick in the wide 4.40-4.80% range that has been in play since mid-January.
• The benchmark remains within the wedge drawn off the longer-term uptrend (beginning at the December ’21 lows) and the short run downtrend drawn off the ’25 high. It last trades at 4.67%, with the boundaries of the wedge located at 4.500% & 4.787% today.
• Fiscal fragility remains a topic of discussion in the UK. This morning has seen Chancellor Reeves once again stress that she has no intention of raising taxes at the same scale as was seen in the ’24 Budget.
• No real reaction was seen following the mark higher in the final services PMI print, gilts were already under pressure.
• Mar-28 supply from the DMO passed smoothly, although the cover was a touch below average.
• There is little of note on the UK calendar for the remainder of the day, with wider focus set to fall on the U.S. ISM services survey and macro inputs (tariff matters and European fiscal issues remain front and centre there).

Bund futures have weakened steadily through the European morning, currently -31 ticks at 130.99. German cabinet approval of a E46bln corporate tax cut alongside spillover from USTs appears to have contributed to the weakness intraday. First support remains at 130.39, the May 29 low, but a bullish technical theme remains intact.

• June is still the front contract in Bunds for now, but expect September to take its place by the end of the day as Eurex rolls progress ahead of this week’s risk events (ECB decision Thursday, US NFP Friday).
• German yields are around 1bp higher across the curve.
• The Eurozone May services PMI was revised up to 49.7 (vs 48.9 flash), which added incremental pressure to EGBs. That helped the composite PMI remain just about in expansionary territory for the fifth consecutive month (it has had a range of 50.2-50.9 through this year), consistent with positive, but sluggish growth.
• 10-year EGB spreads to Bunds are within 0.5bps of yesterday’s closing levels. The BTP/Bund spread is back at 96.5bps at typing.
• Regional focus remains on tomorrow’s ECB decision.