OUTLOOK: Price Signal Summary - Bear Threat in Gilts Remains Present

The USD has lost some of its premium in cross-currency basis markets since President Trump’s election victory.

• This is perhaps best evidenced by 3-month EURUSD X-ccy basis moving into positive territory for the first time since the switch to €STR convention.
• ING focus on tariff issues as an explainer, suggesting that beyond the related “flight to safety, there will be a subsequent negative kickback for Treasuries, as higher inflation erodes the value of fixed rate coupons, whether the Fed cuts or not. And America PLC risks a negative tarnish, one that’s already being seen through the prism of a basis discount on the USD X-ccy vs. EUR, and a widening 10-Year swap spread (Treasuries cheapening to the risk-free rate). These aren’t big moves but are a metaphor for trouble”.
• Note that the potential/likely fiscal sea change in Europe could also shift the global flow picture, which is probably already factoring into cross-currency basis flow.

Fig. 1: USD 3-Month Cross Currency Basis (X-ccy) Vs. EUR, JPY, GBP & AUD

Source: MNI - Market News/Bloomberg

The ECB’s latest forward-looking wage tracker update saw a slight upward revision across the three metrics reported. It’s worth noting that there was also an upward revision noted in the February release. Negotiated wage growth excluding one-off payments now tracks at 3.02% for Q4 2025, a touch above the 2.97% reported in February.

• That still implies a notable decline from the 4.66% estimated wage growth for Q4 2024.
• Including smoothed one-off payments, Q4 2025 negotiated wage growth tracks at 1.55% (vs 1.46% in the February update). This is a sharp moderation from the 5.27% estimated for Q4 2024.
• Overall, the tracker is consistent with President Lagarde’s rhetoric at the March press conference: “Recent wage negotiations point to a continued moderation in labour cost pressures”
• The ECB projects compensation per employee growth to ease to 2.8% Y/Y by Q4 2025, from 4.1% in Q4 2024.
• No material reaction in ERZ5 or Bund futures following the release.

A recently released BBG sources piece noted that “Bank of Japan officials see several reasons against intervening in the bond market even after benchmark yields hit the highest level since 2008”.

• This adds credence to our Tokyo policy team’s recent article which noted that “Bank of Japan officials remain confident that the rapid increase in government bond yields reflects fundamentals and will not impede a moderate economic recovery”.
• It also falls in line with more recent comments from BoJ Governor Ueda.
• This explains the lack of meaningful market reaction in JGB futures, which saw knee-jerk two-way price action before settling back around pre-BBG source report levels.
• The BBG report went on to suggest that “officials are determined not to step into the market unless extreme moves take place, for fear of creating thresholds for traders that would impact market functioning”.
• Note that most market participants already see a relatively high bar for BoJ intervention in JGBs, despite the recent sell off.