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US/German divergence while gilts play to their own drumbeat

BONDS
  • The main theme for core bond markets has been divergence between USTs and Bunds this morning while gilts have been playing the drum to their own beat.
  • UST and Schatz yields are both up a little on the day, but the divergence has been further out the curve: 10-year UST yields are up 0.8bp on the day and 10-year Bund yields down 2.4bp. These divergences have all been driven by inflation expectations this morning, with 10-year breakevens moving higher in the US and lower in Europe. This has translated to a flatter curve in Germany, but steeper in the US today. This largely reflects reactions to some of the Nord Stream 2 headlines seen earlier this week and the market continuing to digest these for the medium-term inflation outlook.
  • With a number of Fed speakers but the only notable data being jobless claims, commodity prices are likely to be watched closely by markets through the day.
  • Gilts have seen a more parallel curve shift, with yields down over 2.0bp across most of the curve. Part of this is reversing the optimism on rate hikes priced in following this week's labour market and inflation data (short sterling has outperformed today too see earlier bullet here). EU-UK negotiator Frost is due to give an update to the Lords at 11:30GMT following on from earlier negative trade headlines.
  • TY1 futures are up 0-1 today at 130-15+ with 10y UST yields up 0.8bp at 1.598% and 2y yields up 0.1bp at 0.502%.
  • Bund futures are up 0.19 today at 170.96 with 10y Bund yields down -0.8bp at -0.256% and Schatz yields unch at -0.828%.
  • Gilt futures are up 0.31 today at 126.12 with 10y yields down -2.2bp at 0.939% and 2y yields down -2.1bp at 0.534%.
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