BONDS: EGBs-GILTS CASH CLOSE: Steeper With Gilts Underperforming

Multiple factors weighed on EGBs and Gilts Wednesday.

• The space was weighed upon from overnight/early developments, including mixed UK CPI data (MNI's review of this week's UK inflation and labour market data is here), and later by supply including Gilt and Bund auctions.
• Bunds saw their biggest downside move of the day in late morning on the publication of an FT interview with ECB's Schnabel who said that the ECB is getting closer to a pause or stop in rate cuts.
• The German curve bear flattened sharply as ECB rate cuts were duly faded, though the curve re-steepened over the course of the day amid long-end underperformance.
• For a second day, losses were fairly steady throughout the session. Both the German and UK curves bear steepened, with Bunds underperforming Gilts.
• Periphery and semi-core EGB spreads widened as the recent equity rally pared back, with BTPs and GGBs underperforming.
• Thursday's calendar includes UK CBI and Eurozone consumer confidence readings, along with appearances by ECB's Nagel and Makhlouf. We also get supply from France and Spain.

Closing Yields / 10-Yr EGB Spreads To Germany

• Germany: The 2-Yr yield is up 4.6bps at 2.178%, 5-Yr is up 6bps at 2.327%, 10-Yr is up 6.4bps at 2.557%, and 30-Yr is up 5.8bps at 2.803%.
• UK: The 2-Yr yield is up 3.4bps at 4.277%, 5-Yr is up 5.2bps at 4.305%, 10-Yr is up 5.3bps at 4.611%, and 30-Yr is up 4.9bps at 5.195%.
• Italian BTP spread up 3bps at 108.4bps  / Greek up 1.8bps at 84.4bps  

• Fed Funds implied rates are little changed on the day for meetings out to June but as much as 2bp lower by end-2025.
• The decline came 30mins either side of the cash equity open with no clear drivers from what were mixed data. From a potential disinflationary, Putin quoted Trump as saying Ukraine will take part in peace talks.
• Cumulative cuts from 4.33% effective: 0.5bp Mar, 4bp May, 12.5bp Jun, 18bp Jul, 27bp Sep and 37bp Dec.
• Ahead, the FOMC minutes at 1400ET will be scrutinized for: why the Fed shifted its statement language on inflation; was there any discussion of a rate hike scenario; and was there any further discussion over the potential impact of government policy shifts?
• MNI FOMC Minutes Preview.
• Fed VC Jefferson also talks on the household balance sheet at 1700ET with both text and Q&A. He last spoke Feb 4, noting the need for caution as per many FOMC members: “As long as the economy and labor market remain strong, I see it as appropriate for the Committee to be cautious in making further adjustments… Over the medium term, I continue to see a gradual reduction in the level of monetary policy restraint placed on the economy as we move toward a more neutral stance as the most likely outcome…that said, I do not think we need to be in a hurry to change our stance.”

February's $16B 20Y Bond new issue auction was slightly weak, with a 1bp tail on a 4.830% high yield vs 4.820% when-issued yield.

• Peripheral stats were on the soft side: bid-cover of 2.43x was the lowest in 4 auctions (2.54x 5-auction average), with primary dealers taking down 17.5% of competitives (16.8% 5-auction average). Directs took 19.5% (16.4% 5-auction average) with indirects taking 63.0% (66.8% 5-auction average).
• From another perspective, it was much weaker result than January's unusually strong auction, and the 5th tail in the last 6 auctions.
• Treasury futures edged very slightly lower on the result, with front TYs down 0.5 ticks at 108-24.5.
• The first re-open of this 20Y Bond is tentatively scheduled for March 18 ($13B).