EGBs-GILTS CASH CLOSE: Bull Steepening Again On Bank Fears

European curves bull steepened strongly for the 2nd consecutive session Friday, as central bank hike expectations pulled back yet again.

• The session's fixed income price action was driven by a banking share price rout, with stalwart Deutsche Bank down over 10% at one point amid fears around the financial sector outlook and going into the weekend.
• 10Y BTP spreads widened as much as 7bp as Bunds rallied sharply and stocks weakened.
• However, the drop in core yields pulled back from extremes in the afternoon as equities stabilised.
• ECB peak rate expectations dipped as much as 25bp before closing 9bp lower; BoE rate pricing closed 7bp lower, but had fallen as much as 30bp intraday.
• Stronger-than-expected Eurozone / weaker-than-expected UK PMIs didn't move the needle much, with market participants much more focused on bank risks.
• For the session, 2Y German yields dropped 13.5bp with 10Y off 6.9bp; the UK short-end rally was less pronounced, with 2Y yields down 8.1bp and the belly outperforming (5Y down 8.4bp), vs 10Y Gilt down 7.9bp.
• Banking-related headlines will be watched for over the weekend, with the highlights of Monday's schedule including German IFO data and multiple ECB speakers (including Schnabel) and BOE's Bailey making an appearance.