EGBs-GILTS CASH CLOSE: Services CPI Surprise Sinks UK Short End

The UK curve bear flattened sharply Wednesday, with Gilts underperforming Bunds, as the April CPI report pushed back the expected timing for the first BoE cut.

• An 0.5pp upside surprise to April services CPI was the key detail that triggered a short-end UK selloff as implied BoE cuts were pared sharply.
• There is now a <10% chance seen of a reduction at the June MPC (vs a coin flip prior to CPI), with around 50% chance of a reduction by August (had been basically fully priced).
• Just after the cash close, PM Sunak confirmed earlier rumours by announcing a UK election in July, but this brought little Gilt market impact.
• EGBs were weighed down in the morning by UK CPI reverberations as well as supply (multiple EUR syndications), but pared some losses in late trade.
• Influenced by UK developments, the German curve bear flattened, while periphery EGB spreads tightened modestly after having widened earlier in the session.
• Thursday's schedule includes flash May PMIs and Eurozone negotiated wage data, and a panel appearance by BoE's Pill.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is up 3.8bps at 3.008%, 5-Yr is up 4bps at 2.584%, 10-Yr is up 3.5bps at 2.534%, and 30-Yr is up 2.7bps at 2.669%.
• UK: The 2-Yr yield is up 14.2bps at 4.452%, 5-Yr is up 12.5bps at 4.136%, 10-Yr is up 10.2bps at 4.232%, and 30-Yr is up 7.2bps at 4.683%.
• Italian BTP spread down 0.8bps at 129bps / Spanish down 0.3bps at 76.4bps