EGBs-GILTS CASH CLOSE: Soft EZ Inflation Sparks Rally

European curves leaned bull steeper Wednesday, with central bank hike prospects dented and curve short ends/bellies boosted by softer than expected inflation data.

• The initial dovish signal sent by German state-level (NRW) May CPI carried on through a soft French May flash inflation reading, boosting EGBs. A strong Italian print dented Bunds only briefly before they pushed to fresh session highs.
• The afternoon saw some consolidation, with the national German print in line with updated estimates, and strong US jobs opening data offsetting a very weak MNI Chicago PMI.
• Bull flattening turned to bull steepening by session's end. Gilts outperformed Bunds, with BoE hike pricing pulling back sharply vs the huge rises in the past few sessions (peak -13bp on the day; ECB -3bp). Periphery spreads traded mixed.
• Central bank speakers (including ECB's Villeroy/de Guindos, and BoE's Mann) had little impact, being overshadowed by the inflation data.
• Thursday sees the eurozone May prelim inflation print, with final PMIs also eyed.

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

• Germany: The 2-Yr yield is down 6.5bps at 2.719%, 5-Yr is down 7.8bps at 2.278%, 10-Yr is down 6bps at 2.282%, and 30-Yr is down 3.8bps at 2.461%.
• UK: The 2-Yr yield is down 10bps at 4.335%, 5-Yr is down 11bps at 4.101%, 10-Yr is down 6.4bps at 4.183%, and 30-Yr is down 6.9bps at 4.515%.
• Italian BTP spread down 1bps at 179.9bps / Greek up 3.7bps at 149.5bps