EGBs-GILTS CASH CLOSE: Belly Outperformance On Dovish ECB Hike

European yields fell Thursday, with curve bellies outperforming as the ECB was seen to have delivered a dovish hike.

• While the ECB's decision to hike its policy rates by 25bp was not fully priced (around 70% probability implied beforehand), leading to a knee-jerk jump in yields, a reversal swiftly followed.
• The accompanying statement implied that the Governing Council saw this as the last hike in the cycle ("rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target").
• The 2Y and 30Y segments lagged the rally across both the German and UK curves, with the policy-rate sensitive belly of the curve noticeably outperforming as European central banks are increasingly seen nearing the end of tightening.
• Periphery spreads fell sharply after the decision, helped by Lagarde brushing off talk of curtailing PEPP.
• Friday morning sees some final Aug inflation data and the Euro labour force survey, along with appearances by ECB's Villeroy and Lagarde.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is down 0.4bps at 3.166%, 5-Yr is down 6.2bps at 2.62%, 10-Yr is down 5.8bps at 2.593%, and 30-Yr is down 2.6bps at 2.727%.
• UK: The 2-Yr yield is down 3.5bps at 4.95%, 5-Yr is down 8.4bps at 4.481%, 10-Yr is down 6.6bps at 4.281%, and 30-Yr is down 5.6bps at 4.608%.
• Italian BTP spread down 4.9bps at 174.7bps / Spanish bond spread down 2.3bps at 104.8bps