Curves Bear Flatten Peripherals Outperform

Bund futures -15, major German cash benchmarks 1.5-3.5bp cheaper late in the day as the curve bear flattens.

• Hawkish musings from ECB’s Lagarde (late Friday) & Holzmann allowed the front end of the curve to provide the weak point throughout the session.
• Bund futures had a look below Friday’s low, but bears couldn’t make the move stick, running out of steam without forcing a test of key technical support.
• Comments from Bundesbank President Nagel, playing down the need for pre-commitment at the ECB’s Sep meeting, helped Bunds to recover further from lows.
• We then topped out again, with firmer natural gas and oil prices helping cap any rallies.
• News of Germany mandating banks for a tap of its Aug-53 line helped the 5s30s German curve away from session flats, although it wasn’t a complete surprise, with some desks flagging the potential for such a move given already detailed German issuance intentions.
• EU supply didn’t provide any notable headwinds for the market, seeing smooth enough, although not impressive, digestion.
• Most EGB curves saw a bear flattening move, akin to Germany.
• A bid in equities and slightly tighter CDS indices seemed to facilitate some light peripheral spread tightening vs. Bunds, while 10-Year core/semi-core was little changed vs. German 10s.
• Liquidity was thinned by a holiday in London.