EGB/Gilt: A Weak Start

European government bonds have traded lower at the start of the week, while regional stocks recovered earlier losses and have now pushed above the Friday close.

• The ECB's Mārtiņš Kazāks indicated earlier that large policy rate hikes could still be on the cards (after the ECB last week delivered a larger than expected hike and removed forward guidance on the September policy rate decision). He stated that there needs to be a 'quite significant' hike in September and that it is a problem if the euro is too weak.
• In addition, Ignazio Visco stated that BTP spreads were higher than suggested by fundamentals - a view, which if shared by others on the GC, could pave the way for the ECB to eventually activate the TPI.
• The expectations and business climate components of the German IFO series came in lower than expected for July, following on the heels of the contractionary PMI readings for the same month published last Friday.
• Bunds have sold off and the curve has bear flattened. Cash yields are now 1-5bp higher on the day with the 2s30s spread narrowing 3bp.
• The OAT curve has twist steepened with the 2s30s spread widening 3bp.
• BTPs mirror the move in bunds with yields up 3-5bp and the long-end of the curve 3-4bp flatter.
• Gilts have lacked clear direction so far with yields now 1-2bp above the Friday close.
• Supply this morning came from Germany (Bubills, EUR5.139bn allotted). Later today France will offer EUR5.1-6.3bn of BTFs.