EGBs-GILTS CASH CLOSE: Flattening Resumes As Short End Sinks

The German and UK curves resumed Thursday where they left off late Wednesday by flattening further, led by a short-end selloff.

• Downside in the session was initially seen following French PMI beats on both the Services and Manufacturing measures, though the German readings were more mixed with Manufacturing weaker than expected. UK PMIs were better than expected but unintuitively, Gilts rallied in the aftermath. The UK and Eurozone composites were both above expectations.
• Otherwise developments were limited: the accounts of the January ECB meeting brought no surprises, while the US PMIs were weak on balance they showed relatively steady growth.
• The short-end weakness was again led by central bank cut repricing. After 8bp of 2024 ECB cuts were priced out Wednesday, another 8bp was priced out Thursday, with 92bp of reductions now seen. For the BoE, 4bp was priced out today, bringing the 2-day retracement to 13bp at 63bp.
• The UK and German curves twist flattened on the day, with Bunds modestly underperforming Gilts. Periphery spreads tightened, led by BTPs, with elevated risk appetite evidenced by ongoing strength in equities.
• German data features early Friday, including the IFO survey; we also get ECB inflation expectations and multiple speakers including de Cos and Schnabel.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is up 5.1bps at 2.905%, 5-Yr is up 2.2bps at 2.448%, 10-Yr is down 1bps at 2.44%, and 30-Yr is down 3.3bps at 2.557%.
• UK: The 2-Yr yield is down 3.2bps at 4.602%, 5-Yr is up 1bps at 4.153%, 10-Yr is up 0.2bps at 4.105%, and 30-Yr is down 0.5bps at 4.63%.
• Italian BTP spread down 2.5bps at 147.5bps / Spanish down 1.3bps at 90.5bps