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The 10-Year gilt/Bund spread is on track for the highest close seen since June, last 203.4bp. The next level of upside interest comes in at the June 6 close (206.8bp). Fiscal risks in the UK have returned to the fore in recent weeks, driving spread widening.

Fig. 1: UK/Germany 10-Year Yield Spread (bp)

Source: MNI - Market News/Bloomberg Finance L.P.

Of note:

EURUSD 2bn at 1.1680/1.1700 (a little far).

EURUSD 2.11bn at 1.1600 (thu).

EURUSD 2.05bn at 1.1600 (fri).

AUDUSD 1.08bn at 0.6500 (fri).

• EURUSD: 1.1600 (942mln), 1.1625 (524mln), 1.1650 (746mln), 1.1680 (948mln), 1.1700 (1.06bn).
• GBPUSD: 1.3350 (326mln).
• USDJPY: 148.00 (624mln), 148.50 (566mln), 149.00 (508mln).
• AUDUSD: 0.6475 (570mln).
• USDZAR: 17.8500 (380mln).

UniCredit write “investor demand for EU bonds has proven healthy so far this year but does not seem to have been sufficient to convince markets to ask for their inclusion in sovereign bond indices. Investors remain concerned that issuance activity by the EU will drop after the NGEU program is phased out after next year”.

• In their view, “common funding will be more frequent than it was before the pandemic, as the EU will want to capitalise on the success of the NGEU program and to address issues that require common action, such as defence, competitiveness and environmental goals. The recent launch of a new defence program, Security Action for Europe (SAFE), the funding of which could require up to EUR150bn, is a good example in this respect. More frequent issuance activity would enhance EU bond liquidity and would encourage demand from investors looking for higher yields than those offered by Bunds or seeking less idiosyncratic risk than that associated with OATs”.