EGBs-GILTS CASH CLOSE: Bank Stock Drop Fuels Bull Flattening Rally

The German and UK curves bull flattened sharply, with Bunds outperforming Gilts in a risk-off move Tuesday.

• European bank stocks fell the most since March's turmoil (the index fell as much as 5%), amid a combination of Italy unexpectedly introducing a windfall tax on banks, and Moody's taking credit rating actions on US institutions.
• A further decline in inflation expectations in the ECB's monthly consumer survey added to the dovish tone for core FI.
• Yields bottomed out in early afternoon trade alongside a tentative stabilisation in Euro bank stocks, but the UK and German curves remained near their flattest levels of the session as the short-end underperformed the longer-end bounce.
• Periphery spreads were relatively well-behaved despite the risk-off tone, with the exception of Greece which widened for the 2nd consecutive session.
• Wednesday's schedule is basically vacant in terms of data and central bank speakers, with Thursday's US inflation figures remaining the focus of the week.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is down 6.9bps at 2.918%, 5-Yr is down 10.3bps at 2.487%, 10-Yr is down 13.2bps at 2.469%, and 30-Yr is down 14.4bps at 2.55%.
• UK: The 2-Yr yield is down 0.9bps at 4.954%, 5-Yr is down 3.5bps at 4.423%, 10-Yr is down 7.6bps at 4.385%, and 30-Yr is down 7.6bps at 4.58%.
• Italian BTP spread down 0.5bps at 165.5bps / Greek up 6bps at 133.7bps