Post-Auction Bounce In Gilts & Softer Equities Promote Stabilisation

U.S. Tsys recovered from session cheaps alongside the downtick in wider equity markets, although the early twist flattening impulse holds. TY futures operate in a contained 0-06 range. Early London flow was dominated by selling of downside exposure and purchasing of upside exposure in FV options, while Asia saw a block seller of FV futures (-1.8K). Participants remain focused on the monthly CPI release that will cross in NY hours.

• EGBs have bounced from session lows on the back of the weakness in equities and bid in Gilts, making fresh session highs in the process. Wire headlines noting that ECB President Lagarde “gave no indication of a September interest rate hike, which has become a topic of discussion” in an interview with the Nikkei seemed to help the move further. The Bund curve has bull steepened (benchmarks flat to 2bp richer). 10-Year peripherals are a little wider vs. Bunds once again, with BTPs and Greek paper widening the most (10-Year BTP/Bund spread is shy of recent wides, lodged yesterday).
• Smooth passage of Jan-33 Gilt supply saw the early (partly delta hedging-related) underperformance in Gilts unwind as the space moved to richest levels of the session, dealing ~1bp richer across the curve. Futures had looked below 100.00 and 10-Year yields got within a couple of bp of YtD highs. Cross-market moves will garner most of the attention with participants now zeroed in on tomorrow’s BoE decision (where a 25bp hike is over 90% priced).

Current levels:

- TY1 futures are up 0-1+ today at 115-07+ with 10y UST yields down -1.5bp at 3.506% and 2y yields up 2.5bp at 4.049%.

- Bund futures are up 0.03 today at 135.43 with 10y Bund yields down -1.6bp at 2.331% and Schatz yields down -1.9bp at 2.606%.

- Gilt futures are unch today at 100.33 with 10y yields down -1.8bp at 3.833% and 2y yields down -0.9bp at 3.839%.