EGBs-GILTS CASH CLOSE: Gilts Soar On Soft UK CPI

The UK curve bull steepened Wednesday with yields dropping sharply after August's CPI reading came out much softer than expected. UK and core EGB yields closed near session lows.

• The downside miss in CPI, with core up 6.2% Y/Y (vs 6.9% expected) and the key Services category up just 6.8% Y/Y (vs 7.2%+ expected) saw BoE's tightening prospects altogether thrown into question.
• Pricing for Thursday's BoE decision duly dropped, now around 45% probability implied of a 25bp hike, vs 80% at Tuesday's close, helping the UK short end rally.
• Bunds had a strong day, pulled higher by the UK developments, with the 5-10Y segment outperforming.
• With little Euro-specific newsflow or macro data (German PPI was broadly in line), the biggest headlines were Germany's Buch gaining EU lawmakers' endorsement to become the top ECB bank supervisor, while Ireland's Makhlouf said the ECB was near the top for rates, with March 2024 probably to early for the first rate cut.
• Periphery spreads had a constructive day, with decent spread narrowing led by BTPs.
• The Federal Reserve decision is the focus late Wednesday, while Thursday's key event is of course the BoE decision (MNI's preview here).

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is down 2.5bps at 3.26%, 5-Yr is down 3.6bps at 2.734%, 10-Yr is down 3.6bps at 2.702%, and 30-Yr is down 2.5bps at 2.842%.
• UK: The 2-Yr yield is down 14.6bps at 4.848%, 5-Yr is down 14.2bps at 4.393%, 10-Yr is down 12.5bps at 4.215%, and 30-Yr is down 8.2bps at 4.632%.
• Italian BTP spread down 3bps at 174.9bps / Greek down 1.6bps at 137.4bps