EGBs-GILTS CASH CLOSE: Rally Extends As Euro Inflation Fizzles

Gilt and Bund yields dropped sharply again on Wednesday, as rate cut expectations continued to mount on the basis of disinflationary progress in the Eurozone.

• A softer-than-expected Eurozone flash November inflation round was presaged by German state CPI data, starting with the early North Rhine Westphalia release, and followed through with an unexpected deceleration in Spanish inflation.
• The national German figure confirmed the state-level findings, but by that time core FI had done most of its rallying for the day, having already been on the front foot as Tuesday's dovish Fed communications reverberated.
• There's now well over 100bp of cuts priced in 2024 for the ECB, a rise of over 10bp on the day, with UK cut pricing following suit.
• The German curve bull steepened, with the belly outperforming on the UK curve.
• Periphery spreads tightened, led by Portugal.
• Thursday's European highlights will again be flash inflation readings, with the Netherlands and France reporting early, and Italy out alongside the Euro aggregate later in the morning. MNI expects the headline EZ print to come in below the 2.7% Y/Y expected coming into today, but there is some debate over the degree of downside potential to the 3.9% core expectation.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is down 8.2bps at 2.836%, 5-Yr is down 8.1bps at 2.366%, 10-Yr is down 6.5bps at 2.432%, and 30-Yr is down 4.6bps at 2.681%.
• UK: The 2-Yr yield is down 6.4bps at 4.568%, 5-Yr is down 11.2bps at 4.1%, 10-Yr is down 7.8bps at 4.096%, and 30-Yr is down 4.7bps at 4.598%.
• Italian BTP spread down 1.5bps at 174.2bps / Portuguese PGB spread down 4bps at 63.9bps