EGBs-GILTS CASH CLOSE: ECB Takes A Dovish Turn

EGBs rallied strongly Thursday in the wake of the ECB's policy decision, with the expected 75bp hike accompanied by a Statement pointing to a softer rate hike path ahead.

• In particular phrase “expects to raise interest rates further” dropped “over the next several meetings”, with the ECB emphasising a meeting-by-meeting approach.
• Terminal rate pricing fell 30bp (2.55% Jul 2023), helping the short-end / belly of the German curve outperform.
• Periphery EGBs outperformed with BTPs gaining most: initially on the more dovish ECB rate outlook and accelerating after Lagarde said the Governing Council "deliberately" didn't discuss QT in a substantive way.
• The UK curve underperformed Germany at the short end, but outperformed through the rest of the curve. The BOE confirmed the first QT Gilt sale will take place on Nov 1.
• German state inflation is the highlight first thing Friday morning.

CLOSING YIELDS / 10-YR PERIPHERY EGB SPREADS TO GERMANY:

• Germany: The 2-Yr yield is down 17.2bps at 1.773%, 5-Yr is down 17.9bps at 1.818%, 10-Yr is down 14.9bps at 1.962%, and 30-Yr is down 9.6bps at 2.011%.
• UK: The 2-Yr yield is down 14bps at 3.138%, 5-Yr is down 18.3bps at 3.48%, 10-Yr is down 17.3bps at 3.403%, and 30-Yr is down 16.8bps at 3.51%.
• Italian BTP spread down 17.2bps at 204.6bps / Greek down 8.6bps at 244.3bps