EGB/Gilt: UK Political Pressures Boil Over

Euro area sovereign curves have twist steepened this morning, gilts have sold off and equities enjoy a modest relief rally following yesterday's sell off.

• Long running political instability in the UK has boiled over following yesterday's resignations from Chancellor of the Exchequer Rishi Sunak and Health Secretary Sajid Javid. While PM Johnson has sought to shore up his position by quickly promoting loyal supporter Nadhim Zahawi to replace Sunak, fresh resignations from the Children's and Treasury ministers has further elevated the risk of a change in leadership.
• The BoE's Huw Pill has indicated a willingness to tighten monetary policy faster if needed.
• Gilts have sold off with cash yields up 5-8bp and the curve bear flattening.
• The ECB's Pierre Wunsch has stated in the FT "If the fragmentation in bond markets is unwarranted then we should be as unlimited as possible".
• German factory orders for May came in better than expected (0.1% M/M vs -0.5% survey).
• The bund curve has twist steepened with the 2s30s spread widening 8bp.
• OATs have traced out a similar path to bunds with the long end of the curve 6bp steeper.
• BTPs traded in line with core EGBs with the curve 6bp steeper.
• Supply this morning came from Germany (Bund, EUR4.009bn allotted), Greece (GTBs, EUR625mn) and the EU (Bills, EUR1bn).