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Bunds move lower as Germany creates extra securities; gilts 10s30s flatten

BONDS
  • There have been two dominating stories in core FI markets this morning.
  • First, the reaction to yesterday's announcement from the Bank of England that it would be pressing ahead with active gilt sales (but would not be selling any long-dated 20+ year gilts in 2022). We also saw the release of UK CPI a tenth higher than consensus expectations. The 10s30s curve has flattened 17bp today on the QT announcement while short/medium gilts had initially opened the day lower, but have retraced a large portion of their losses to now trade with yields around 3-5bp higher than yesterday's close.
  • Second, the German Finanzagentur has created an additional E54bln of extra government securities. This is not through extra issuance, but the securities will be held on the Finanzagentur's own account and used for repo purchases. The market was a bit confused by the announcements with some other newswires alluding to this being extra issuance and Bunds fell around 100 ticks in the initial reaction. Some move lower is justified as this will help address a collateral shortage in the market, particularly going into year-end, and hence asset swap spreads have narrowed.
  • US Treasuries followed Bunds lower.
  • Looking ahead we have US housing data and the Beige Book. The BOE's Cunliffe and Hauser testifying on the temporary gilt purchase programme and are also due to hear from BOE's Mann, ECB's Centeno and Visco and the Fed's Kashkari, Evans and Bullard.
  • TY1 futures are down -0-14+ today at 110-14+ with 10y UST yields up 5.1bp at 4.060% and 2y yields up 4.8bp at 4.480%.
  • Bund futures are down -0.95 today at 136.27 with 10y Bund yields up 5.2bp at 2.333% and Schatz yields up 11.4bp at 2.067%.
  • Gilt futures are down -0.40 today at 974.49 with 10y yields up 3.8bp at 3.980% and 2y yields up 3.1bp at 3.557%.
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