There was an initial rush higher in.....>

EGB SUMMARY: There was an initial rush higher in the Bund contract as investors

traded geo-political threats. However, the quite dramatic move higher ran out of

steam after a couple of hours.

- Contacts reported that government bond and swap trading desks were quiet, in

terms of volumes and noise and once again, pointed to a futures markets being

the driver.

- The Bund yield bull flattened strongly, the 2Y dropped 1.7bp and the 10Y by

3.1bp to 0.385%. Yet, in the rally over the past couple of days the Bund

contract volatility skew has switched its leaning from investors hedging the

downside in price, to higher implied vols on the upside. This brings at least

the threat of an ALM driven move if rates head lower.

- All EGB markets are underperforming Germany and Italy is leading the

underperformance. The Bund-BTP spread has reached 165.6bp after a 3.6bp widening

this morning. Not helping BTPs is an IlSole24Ore article talking of potential

legal issues for pension reforms in October that could a significant influence

on State finances.