EGB/Gilt: ECB Gearing Up For First Hike

European government bonds have continued to rally this morning, while equities have also made ground. The dollar is on the back foot against G10 FX and commodities are broadly higher.

• There was a flurry of hawkish ECB commentary this morning. Joachim Nagel has stated that the policy rate could be hiked in July, with Francois Villeroy de Galhau and Frank Elderson similarly indicating that rates could rise gradually from the summer. President Lagarde added that rates could rise within weeks of bond purchases concluding, but also stressed that the pace of normalisation would still be gradual following the first hike.
• Focus this afternoon shifts to the US inflation report for April.
• Supply this morning came from the UK (Gilt, GBP2.5bn), Germany (Bund, EUR3.23bn allotted), Italy (BTP, EUR6.5n), Portugal (OT, EUR750mn).
• Gilts have traded firmer with the very long end of the curve slightly bull steepening.
• Bunds have outperformed gilts on the day. Cash yields are 2-6bp lower with the belly of the curve outperforming.
• OATs have rallied across the curve with yields down 3-7bp.
• BTPs have outperformed core EGBs, with the short end leaving the charge. Yields are now down 5-13bp.