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EGB/Gilt: ECBs Interpretation of Inflation Spike In Focus

BOND SUMMARY

EGBs have traded weaker ahead of today's ECB meeting, while equities and FX have been mixed.

  • No new policy decisions are expected at the GC meeting, but President Lagarde is expected to reassert the forward guidance given the prior hawkish shift in market rate expectations.
  • Markets will also be watching closely for any signs of the ECB becoming more concerned about the risk of second-round inflation effects given that the official position to date has been that the inflation spike is largely transitory.
  • Bunds have traded weaker with cash yields broadly 2bp higher on the day.
  • OATs have marginally underperformed bunds, particularly in the belly of the curve.
  • BTPs have sold off sharply and the curve has bear flattened. Yields at the short-end/belly are up 6-7bp.
  • The gilt curve has seen a hefty narrowing on the back of the short end selling off and the longer end rallying. The 2s30s spread is 12bp narrower and underpinned by the previous announcement by the DMO that planned debt sales will be cut by GBP60bn for this fiscal year.
  • Supply this morning came from Italy (BTP/CCTeu, EUR7bn).
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