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EGB/Gilt: Post-ECB Sell-Off Continues

BOND SUMMARY

European government bonds have traded weaker this morning, extending last week's post-ECB sell off. Equities are also broadly lower as are regional FX versus the dollar.

  • The bund curve has sharply bear flattened with yields up 2-12bp and the 2s30s spread narrowing 10bp.
  • OATs have underperformed bunds with yields now up 3-14bp and trading near the highs of the day.
  • BTPs have underperformed core EGBs, with continued spread widening intensifying fragmentation risks. Yields are now 7-23bp higher, while the 10-year BTP-Bund spread has widened to 232bp - a level not seen since the early days of the pandemic in 2020.
  • The ECB's Gediminas Simkus this morning stated that there are upside risks to inflation and the neutral policy rate is currently very low.
  • The UK economy unexpectedly contracted in April (-0.3% M/M vs 0.1% expected) with the industrial, construction and service sectors all showing a drop in output.
  • Gilts have traded lower with yields up 2-8bp.
  • Supply this morning came from Germany (Bubills, EUR1.767bn allotted). Later today France will offer EUR4.7-5.9bn of BTFs.
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