BONDS: EGBs-GILTS CASH CLOSE: Bear Flattening On Inflation Data And UK Budget

Multiple hawkish developments Wednesday saw European bonds weaken sharply, with Gilts selling off on fiscal concerns but Bunds ultimately closing even weaker.

• The key driver of weakness and intraday volatility was the much-anticipated UK Budget announcement, from which the implications of near-term inflation and longer-term issuance saw Gilts sell off across the curve.
• The UK curve initially bear steepened as supply implications were digested, but closed bear flatter with yields trading in wide ranges. BoE cut probabilities were pared, with 32bp in cumulative 2024 cuts now seen, vs 39bp pre-budget.
• Even prior to the UK budget, bond-negative data (among which: above-expected German CPI/Eurozone Q3 GDP/US private payrolls) applied broader pressure.
• EGBs were dragged by movements in Gilts, with the German curve bear flattening, and periphery EGB spreads mostly widening.
• The strong inflation data helped push back December ECB cut pricing, with 50bp implied down to 20% probability vs 40% Tuesday. Even as the short-end sold off, German 10Y yields posted their highest close since July; UK yields would close off the highs.
• Thursday's focus will be the Italian and French October flash inflation readings, with the Eurozone reading later in the morning.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany