Citi Touch On Gilt-Bund Dynamics

Earlier today Citi noted that “the sharp cross-market cheapening of Gilts vs Bunds can be directly mapped to relative data surprises. Yesterday’s UK labour market data could be the start of a turn.”

• “Gilts are likely to remain very sensitive to surprises near-term given the BoE MPC is likely looking for the data to provide better optics for a pause. Next up will be the PMIs on 23 May, then CPI on 24 May (which may show strength in service prices, but the market may be more reactive to any downside in headline inflation).”
• “At the very least, UK data is perhaps unlikely to maintain its relative momentum which could start to tighten 10-Year-Bund.”
• “One drawback is that euro area data looks underwhelming (and the economic surprise index actually fell more than for the UK yesterday), although we still think the market is slightly underestimating the ECB’s hiking intent over the summer.”
• “Sticking just to the UK, lost data momentum supports our tactical Aug/Sep MPC SONIA flattener and strategic 10s30s Gilt steepeners.”