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[MARKET ANALYSIS] Gilts lead after soft GDP though BoE pricing largely unaffected, USTs treadwater

The soft GDP data from the UK is driving a strong performance in Gilts, suggesting that the market is now skewing towards earlier monetary easing expectations from the BoE.

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[MARKET ANALYSIS] Gilts lead after soft GDP though BoE pricing largely unaffected, USTs treadwater

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  • A contained start for most benchmarks.
  • Gilts are the relative outperformers after soft GDP data. The benchmark opened higher by 18 ticks before climbing another nine to a 91.30 peak and notching a fresh WTD high. Weighing on the UK's 10yr yield to a 4.47% trough. For the BoE, the data works in favour of the doves who wanted to cut last week and somewhat skews the narrative towards a March cut vs current pricing for April. However, pricing didn't really move as we await next week's CPI and employment/wage metrics; furthermore, while the series was weak, the economy was still resilient during a tumultuous Q4, a finding that tempers the otherwise dovish impulse.
  • JGBs returned from Wednesday's holiday lower, reacting to the US NFP print and bearish UST action. Pressure that proved fleeting as the benchmark lifted to a 132.02 peak with gains of just over 10 ticks at best. However, that upside faded across the APAC session to a 131.52 trough. Drivers for this include a Reuters interview with Mizuho's Kozhimizu, who expects as many as three hikes by the BoJ in 2026, and a move as soon as March or April is entirely possible. As it stands, just 3.5bps of tightening is implied in March, 14bps in April and 23.6bps in June, with a move not fully priced until July, where 30bps is implied.
  • Bunds firmer, but contained, in narrow 128.62-76 parameters. Specifics for the bloc light, no move to a handful of ECB remarks, which stuck to the script.
  • A similar story for USTs, rangebound in APAC hours towards the mid-point of the post-NFP drop. Holding at 112-11+ in thin parameters that are well within Wednesday's 112-00 to 112-20 bound. Today, the US docket is comparatively light, with supply and weekly jobs the highlights. Barring a surprise on those, it may be a bit of a filler day into Friday's CPI.
Context

While yields have dipped and some dovish sentiment is surfacing, the overall pricing remains stable as traders await upcoming CPI and employment data, indicating a cautious approach amidst mixed economic signals.

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