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BONDS: EGBs-GILTS CASH CLOSE: Bailey Dovishness Spurs UK Steepening

BONDS
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Gilts outperformed EGBs Thursday in a steepening move on the UK curve.

  • The session started on a very dovish note for the UK short end as BoE Gov Bailey said in an interview that the bank could be a "bit more aggressive" and a "bit more activist" on rate cuts.
  • Bailey's comments added to perceived potential for back-to-back cuts in Nov and Dec, and there are now ~44bp of reductions priced through the latter meeting vs ~37bp at Wednesday's close. (In contrast, ECB pricing was relatively unchanged.) DMP data, while it didn't garner nearly the same degree of market reaction, was notable for showing softening in realised UK employment growth. It's unlikely to signal panic on the MPC at this stage though.
  • While Gilt gains would pull back from extremes, particularly in mid-afternoon on a much stronger than expected US ISM Services report, they would bounce again toward the cash close and easily outperformed EGBs on the day.
  • Indeed, EGBs performed poorly with renewed OAT spread widening (10Y/Bund +2.5bp) amid heavy French and Spanish supply. The belly underperformed on the German curve, with yields up around 4-5bp throughout; periphery EGB spreads tightened slightly.
  • The focus of Friday's schedule will be a morning appearance by BoE's Pill, eyed for any corroboration of Bailey's perceived dovishness. We also get some Eurozone industrial production data, and Italian retail sales/budget readings, as well as multiple ECB speakers (incl Villeroy).

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

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Gilts outperformed EGBs Thursday in a steepening move on the UK curve.

  • The session started on a very dovish note for the UK short end as BoE Gov Bailey said in an interview that the bank could be a "bit more aggressive" and a "bit more activist" on rate cuts.
  • Bailey's comments added to perceived potential for back-to-back cuts in Nov and Dec, and there are now ~44bp of reductions priced through the latter meeting vs ~37bp at Wednesday's close. (In contrast, ECB pricing was relatively unchanged.) DMP data, while it didn't garner nearly the same degree of market reaction, was notable for showing softening in realised UK employment growth. It's unlikely to signal panic on the MPC at this stage though.
  • While Gilt gains would pull back from extremes, particularly in mid-afternoon on a much stronger than expected US ISM Services report, they would bounce again toward the cash close and easily outperformed EGBs on the day.
  • Indeed, EGBs performed poorly with renewed OAT spread widening (10Y/Bund +2.5bp) amid heavy French and Spanish supply. The belly underperformed on the German curve, with yields up around 4-5bp throughout; periphery EGB spreads tightened slightly.
  • The focus of Friday's schedule will be a morning appearance by BoE's Pill, eyed for any corroboration of Bailey's perceived dovishness. We also get some Eurozone industrial production data, and Italian retail sales/budget readings, as well as multiple ECB speakers (incl Villeroy).

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

Keep reading...Show less