EGB-Led Global Rally As ECB Hikes Priced Out

EGB yields have fallen sharply in early trade Tuesday, pulling down Treasury and Gilt yields with them.

• The catalyst for the EGB move was uncharacteristically dovish commentary by ECB hawk Knot who sounded unconvinced about the need for hikes past next week's near-certain 25bp raise (tightening beyond this month "would at most be a possibility but by no means a certainty").
• The comments knocked 5bp off the market- implied ECB terminal policy rate and saw the German curve bull steepen with Schatz yields down double-digits.
• Periphery EGB spreads tightened on prospects of a less hawkish ECB, with 10Y BTP/Germany hitting tights not seen since Jun 28 (163bp).
• The EGB moves triggered a rally in Treasuries, led by the curve belly, with 10Y yields hitting the lowest levels since June (a touch below 3.75%).
• Gilt gains were briefly pared by a weak long-dated auction, but subsequently recovered.
• US data is the focus for the rest of the session, with retail sales, industrial production, inventories, and homebuilder sentiment featuring.

Latest levels:

• Sep US 10Y futures (TY) up 8/32 at 112-31 (L: 112-19.5 / H: 113-2.5)
• Sep Bund futures (RX) up 82 ticks at 133.81 (L: 133.08 / H: 133.97)
• Sep Gilt futures (G) up 88 ticks at 95.63 (L: 95.2 / H: 95.67)
• Italy / German 10-Yr spread 3.7bps tighter at 163.7bps