EGBs-GILTS CASH CLOSE: US CPI Bear Flattens UK And German Curves

Core European FI sold off sharply Wednesday after a third successive stronger-than-expected US inflation report.

• The UK and German curves bear flattened with notable sell-offs in the short-end/belly as near-term rate cuts were priced out. Gilts underperformed Bunds.
• Thursday's highlight is the ECB meeting - while there is no expectation of a shift in policy, communications pointing to a June cut will be closely eyed, especially as US inflation data appears to be pushing that prospect further away for the Fed.
• Just 79bp of 2024 ECB rate cuts remain priced (10bp less than pre-release), with June no longer a "sure thing" (around 84% vs nearly 100% earlier this week).
• The BoE equivalent rose 9bp post CPI but that move continued into the close, with just 57bp of 2024 reductions now priced in 2024 - vs 73bp prior.
• 2Y UK yields quickly rose nearly 8bp on the CPI data, with the selloff continuing into the close with a 14bp rise on the day.
• While periphery EGB spreads initially widened on the CPI release, they recovered as equities bounce and closed tighter to Bunds.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is up 7.8bps at 2.966%, 5-Yr is up 7.6bps at 2.461%, 10-Yr is up 6.4bps at 2.435%, and 30-Yr is up 3.9bps at 2.555%.
• UK: The 2-Yr yield is up 14.2bps at 4.347%, 5-Yr is up 14.3bps at 4.052%, 10-Yr is up 11.9bps at 4.148%, and 30-Yr is up 9.2bps at 4.62%.
• Italian BTP spread down 0.8bps at 137.2bps / Spanish down 0.4bps at 80.8bps