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Europe Bear Flattening Fades As ECB / BoE Hike Pricing Pared

BONDS
Early bear flattening in the German and UK curves has been pared in the past hour, particularly so for Germany where there is now some bear steepening evident: 2s10s is now 1.7bp less inverted on the day at -43.6bp (mid-session low was -46.2bp) as Schatz yields are around their opening levels (3.112% vs 3.176% session high).
  • The German short end has been helped by a 5bp pullback from session highs for terminal ECB rate expectations, now below the day's opening levels (though still up +1.6bp on the day to 3.96%, implying 21bp of further hikes left in the cycle).
  • The UK curve's bear flattening remains intact though. Implied BoE peak rates have pulled back 12bp from the highs and below the opening post-labour market data level, but are still up 6bp on the day (5.94%, 69bp of hikes left in the cycle). Notably despite the pullback in implied rates further down the strip since this morning, September MPC hike pricing has not pulled back from the 30bp level (ie 20% prob of a 50bp hike).
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