The day started on a bearish footing....>

EGB SUMMARY: The day started on a bearish footing for the debt markets. The

initial impetus was a very weak UST market that had wakened up to the horrible

reality that the Treasury was to issue a mammoth $258bln. The other factor

dragging down EGBs was the prospect of a new 2018 Spanish syndicated deal.

- As it turned out, the Spanish deal encountered an enormous demand. The order

book reached E25.8bln and this demand lessened the pressure on all debt. Spain

ultimately priced E6bln of the deal.

- The 2Y Schatz auction was no so successful in the morning, with the new bond's

auction being technically uncovered.

- During the afternoon, EGBs put in a very strong showing and German 10Y debt

outperformed semi-core and peripheral markets. MNI Pi (positioning indicator)

has identified a sizeable fast money short in Schatz, Bobl and Bunds and with

the roll approaching this may be the catalyst for German outperformance.

- The EGB curve steepened on Tuesday, although only marginally. The 10Y Bund

yield was down 0.6bp at 0.729% and Bund-BTP/PGB/Bonos 10Y spreads each widened

by around 2.5bp.