[MARKET ANALYSIS] Bonds initially pressured before EGBs benefitting from German State CPIs ahead of the 13:00GMT mainland print

• Benchmarks began the morning on the backfoot, with downside of around five and 20 ticks for USTs and Bunds respectively. Action that came as the benchmarks trimmed into and through the APAC session, with further pressure emanating from weak demand at the Japanese 10yr tap; an auction that sent JGBs lower from 132.23 to a 131.93 session trough, trimming initial gains of around 15 ticks to losses of 16 at worst.
• Since, the complex generally benefited incrementally from a dip in the risk tone as China imposed export-controls on dual-use items to Japan.
• For EGBs, no real move to the French Prelim. HICP metrics, which came in as expected M/M and slightly cooler than expected Y/Y at 0.7% (prev. 0.8%). More pertinently, the German State CPIs ahead of the 13:00GMT nationwide figure, where consensus is for the headline Y/Y to moderate to 2.0% (prev. 2.3%) and the HICP Y/Y to 2.2% (prev. 2.6%); for the respective M/M, at 0.3% (prev. -0.2%) and 0.4% (prev. -0.5%). State CPIs lifted Bunds to a 127.67 high, firmer by 27 ticks at most. A move perhaps driven by the M/M for North Rhine-Westphalia coming in at 0.0% (prev. -0.3%), cooler than the nationwide expectations, as above, for a lift to 0.2% (prev. -0.2%).
• Gilts opened lower by 12 ticks, acknowledging the discussed overnight pressure. Thereafter, the benchmark fell to a 90.71 base, with peers also lower at that point. Since, Gilts have picked up alongside EGBs but remain in the red by a tick or two. Once again, the docket ahead for the UK is devoid of Tier 1 events.
• Ahead, USTs look to remarks from Fed's 2027 voter Barkin, text and Q&A expected, before the region's own Final PMIs.

Bonds faced initial pressure due to weak demand in Asian auctions and geopolitical tensions from China's export controls on Japan, which negatively impacted market sentiment. However, German State CPIs lifted Bunds, suggesting that if the nationwide CPI prints align with lower expectations, it could support a more dovish outlook for European rates. Keep an eye on Fed comments later, as they may influence the trajectory for USTs and overall fixed income dynamics.