EGBs-GILTS CASH CLOSE: Rally Fades, German Short End Outperforms

A morning rally across EGBs and Gilts faded in the afternoon Tuesday, with the only consistent theme throughout being German short-end outperformance.

• The stand out move early in the session was strong bull steepening in the German curve as Schatz yields dropped over 9bp.
• Multiple factors were behind the move, including some comments by ECB's Knot interpreted as relatively dovish; weak German factory orders; lower oil prices and equities; a pullback in consumer inflation expectations per the ECB survey; and mixed Eurozone retail sales.
• The move faded in the afternoon, with no particular driver, though heavy issuance (including multiple syndications today and announced for tomorrow, including E7bln in EU today / Spain Weds) weighed, as did a recovery in equities in the afternoon alongside some selling pressure in US Treasuries.
• By the end of the session, the German curve had twist steepened, with the UK's twist flattening. Periphery EGB spreads widened slightly, led by BTPs.
• Wednesday's docket includes German industrial and Italian retail sales data, and appearances by ECB's Guindos / Knot / Panetta.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany:

• Germany: The 2-Yr yield is down 3.5bps at 2.854%, 5-Yr is down 1.9bps at 2.384%, 10-Yr is down 0.9bps at 2.372%, and 30-Yr is up 1bps at 2.555%.
• UK: The 2-Yr yield is up 3.3bps at 4.478%, 5-Yr is up 1.5bps at 4.184%, 10-Yr is down 0.1bps at 4.207%, and 30-Yr is down 3.8bps at 4.473%.
• Italian BTP spread up 2.7bps at 178.4bps / Spanish up 0.4bps at 99.9bps