OPTIONS: Mixed UK Rates Trade Following BoE

Gilts led a long-end selloff in the European government bond space Wednesday.

• A combination of weaker global long-duration bonds and UK-specific structural issues saw Gilts sell off sharply for a second consecutive session: 10Y yields hit the highest since 2008, with 30Y at fresh post-1998 highs.
• Bunds weakened in sympathy, with the softness in global core FI exacerbated by solid US jobless claims data, as well as dollar gains on overnight reports that Pres-elect Trump would make an emergency tariff declaration.
• Heavy supply also weighed, including Gilt, Bund, and Italian issuance, with French/Spanish auctions anticipated Thursday.
• German Factory orders and retail sales missed versus consensus but this did not move markets.
• Both the UK and German curves bear steepened. Semi-core/periphery EGB spreads narrowed slightly, however.
• Thursday sees the aforementioned supply, plus multiple data points including UK BRC shop price index, DMP inflation expectations, and KPMPG/REC jobs report, along with German trade/regional CPI.

Closing Yields / 10-Yr EGB Spreads To Germany

• Germany: The 2-Yr yield is up 0.5bps at 2.201%, 5-Yr is up 2bps at 2.298%, 10-Yr is up 6.6bps at 2.549%, and 30-Yr is up 4.7bps at 2.764%.
• UK: The 2-Yr yield is up 4.5bps at 4.516%, 5-Yr is up 7.4bps at 4.523%, 10-Yr is up 11.3bps at 4.796%, and 30-Yr is up 10.9bps at 5.355%.
• Italian BTP spread down 1.7bps at 113bps / French OAT  down 1.8bps at 80.5bps  
   

• US TSY 29Y-10M BOND AUCTION: NON-COMP BIDS $34 MLN FROM $22.000 BLN TOTAL

• Despite the US Dollar being off its best levels of the session, the DXY is registering 0.5% gains on Wednesday. Broadly, yesterday’s US data has been a factor for the renewed optimism, although gains were exacerbated by reports that Trump is considering a national economic emergency declaration to allow for a new tariff program.
• Standing out in G10 FX has been sterling’s underperformance, particularly notable given the moves came alongside significant pressure on UK gilts, prompting 30-year yields to rise to the highest level since 1998.
• GBPUSD fell to the lowest level since April, with momentum picking up through the early European lows of 1.2440, prompting the pair to trade down to 1.2321. The trend condition in GBPUSD remains bearish and the sharp sell-off on Jan 2 confirmed a resumption of the medium-term downtrend. Should this short-term sentiment persist, the immediate focus will be on the 2024 lows at 1.2300 and 1.2266, the Nov 14 2023 low.
• In tandem, EURUSD eroded the rally from earlier in the week, and is now ~130 pips off the week’s highs and notably back below the prior breakdown point of 1.0335. The bear trigger has been defined at 1.0226, the Jan 2 low.
• The underperformance for UK assets has prompted a solid uptick for EURGBP on Wednesday, and a firm break above resistance at 0.8311, the 50-day EMA. We have reached a high of 0.8352 so far.
• In emerging markets, USDZAR has advanced 1.2% on the session, and made a fresh 7-month high in the process. Today’s gains have confirmed a resumption of the dominant uptrend. Sights are on the nearby round figure/Jun 6 high of 19.0000/19.0054, where a break would open 19.2696, the Apr 23 high.
• Australia retail sales and China CPI/PPI highlight Thursday’s calendar. Tomorrow is a US federal holiday for Jimmy Carter’s funeral before Friday’s employment report.