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EGB/Gilt: UK Rate Expectations Revised Lower

BOND SUMMARY

European government bonds have rallied sharply this morning with gilts leading the charge alongside weaker trading in equities and FX vs USD.

  • UK CPI for May printed in line with expectations (9.1% Y/Y) and inched higher from the previous month. Core CPI came in slightly below expected (5.9% Y/Y vs 6.0%) and dropped 0.3pp from the previous month. The lack of another material inflation surprise has contributed to this morning's rate re-pricing at the short end.
  • Gilt yields are down 10-18bp with the curve bull steepening.
  • Bunds have rallied with the belly of the curve outperforming. Cash yields are now 8-11bp lower on the day.
  • The belly of the OAT curve has similarly outperformed with yields 8-10bp lower.
  • The long end of the BTP curve has slightly bull steepened with the 2s20s spread widening 2bp.
  • Italy's populist 5-Star Movement (M5S) has lost its position as the largest in the Chamber of Deputies after Foreign Minister Luigi Di Maio resigned in order to form his own political party.
  • Supply this morning came from Germany (Bund, EUR1.263bn allotted)
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