EGB/Gilt: Hawkish ECB, Dovish BoE

Euro area government bonds have sold off this morning, spurred on by hawkish ECB commentary, while gilts have rallied in the aftermath of yesterday's BoE decision.

• The ECB's François Villeroy de Galhau stated that while 'monetary tightening' was still some way off, the underlying inflation trend is clearly above the 2% target and that it was reasonable for policy rates to be above zero by year end.
• Elsewhere, Joachim Nagel argued that the ECB must get on with normalising policy as the window for doing so was closing, while Boštjan Vasle stated that inflation is becoming broad based and the appropriate time to start hiking rates is before the summer.
• The bund curve has bear flattened with cash yields up 2-4bp with the curve 1bp flatter.
• The OAT curve has similarly flattened with the 2s30s spread narrowing 3bp.
• BTP yields are now up 2-3bp across much of the curve.
• The ruling Conservative party has suffered significant losses in local elections, although Labour has not been the only beneficiary as the Liberal Democrats have also made headway.
• Yesterday's BoE meeting underwhelmed markets, which were expecting more aggressive posturing on policy tightening. Gilts have firmed and the curve has bull steepened. Cash yields are 1-4bp lower on the day with the 2s30s spread widening 3bp.
• Supply this morning came from the UK (UKTBs, GBP2bn).