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Cheaper, Bunds Unwind ECB Rally & Peripherals Widen

EGBS

The early morning hawkish sources report re: the ECB from the FT (‘ECB hawks warn of December rate rise if inflation and wages stay hot’) applied pressure to Bunds, with the contract only really finding a base in recent trade, as the EURIBOR strip ticks away from worst levels.

  • The usually hawkish ECB Governing Council member Muller indicated that he doesn’t expect further rate hikes in the coming months, while noting that higher-than-expected inflation levels could generate the need for another hike.
  • ECB-dated OIS terminal rate pricing is unchanged on the day, but there has been a modest unwind of some of the pricing of cuts seen in ’24.
  • Bund futures ~20 ticks above yesterday’s low, with the ECB-derived rally unwound.
  • German cash benchmarks 4-5bp cheaper.
  • Core/semi-core EGB curves see similar moves.
  • The sources piece and this morning’s outright cheapening seems to have been enough to trigger some re-widening in peripheral spreads, with BTPs and GGBs seeing the largest moves (+2.5bp vs. Bunds). Yesterday’s dovish hike, which signalled a likely end to the hiking cycle, and lack of movement on the PEPP front promoted peripheral compression post-ECB.
  • Various peripheral political figures have expressed unease with the latest ECB rate hike.
  • Elsewhere, a late Thursday BBG source piece suggested that the Italian PM and Finance Minister are “increasingly aware of the impact that a wider-than-announced deficit could have on bond yields and the ability to finance new measures,” suggesting they are seeking to reassure investors that Italy’s finances are under control.
MNI London Bureau | +44 0203-865-3809 | anthony.barton@marketnews.com
MNI London Bureau | +44 0203-865-3809 | anthony.barton@marketnews.com

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