EGB/Gilt: Contemplating A Larger ECB Hike In October

European government bonds sold off early into the session but soon started to recoup losses.

• Although President Lagarde stated that yesterday's 75bp ECB hike is not a new normal, her comments on monetary policy still being 'stimulative' despite the front-loading, and that policy rates are far from the level that is consistent with returning inflation to target, suggest that a 75bp hike in October is a distinct possibility.
• OIS-implied pricing indicates that 50bp is the baseline for October, with markets starting to price in a larger hike.
• Bunds sold off in early trade before regaining lost ground and now trading between flat and marginally higher on the day.
• OATs have similarly recouped early losses while continuing to trade below yesterday's close. Cash yields are 1-4bp lower across much of the curve.
• The BTP curve has now twist flattened with the 2s30s spread narrowing 6bp.
• On the back of the energy aid package announced yesterday and likely impact on curbing near-term inflation, gilts continue to firm with yields down 5-9bp and the curve bull steepening.
• Supply this morning came from the UK (UKTBs, GBP3.5bn) and Italy (BOTs, EUR7bn).