ECB Speak Promotes Rally & Spread Tightening

Bund futures +33 at 130.41, shy of initial resistance at the 20-day EMA (130.81).

• German yields are 3-6bp lower as we move towards the cash close, bull steepening.
• EGB spreads to Bunds are a little tighter on the day.
• Trading was limited by NY & London holidays.
• Dovish comments from ECB’s Lane and Villeroy allowed EGBs to rally.
• Lane noted that the breadth of the domestic inflation pressures is narrowing, while pointing towards moderating wage growth pressures since late ’23.
• He also warned on the risks of keeping policy restrictive for too long.
• Villeroy pushed back on the idea that the ECB could not cut rates at consecutive meetings, highlighting the need for “maximum optionality,” albeit with data dependence stressed.
• Euribor futures are +1.5 to +6.0 following the comments.
• ECB-dated OIS shows ~62bp of ’24 cuts vs. a little under 60bp late on Friday.
• EGB spreads to Bunds tightened a little on the headlines.
• This came after the passage of this morning’s EU & Belgian supply allowed EGBs to rally from lows, even though cover ratios were not particularly strong.
• Geopolitical angst may have also supported bonds.
• The latest ECB consumer inflation expectations survey is due tomorrow, with CPI data out of Germany (Wednesday) and the Eurozone (Friday) providing the focal points of this week’s regional data calendar.
• Several ECB speakers are also due on Tuesday.