[MARKET ANALYSIS] Gilts lead on Burnham and GDP, OAT-Bund 10yr yield spread hits another multi-year high

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[MARKET ANALYSIS] Gilts lead on Burnham and GDP, OAT-Bund 10yr yield spread hits another multi-year high

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  • Fixed is firmer across the board, despite the modest upside in energy and hotter-than-expected inflation out of France and Germany, with Gilts leading as the space gets respite from its recent trajectory, benefitting from UK PM Burnham’s comments and strong GDP data.
  • Specifically, Burnham said he was open to numerous outcomes with regards to UK-EU relations as the current post-Brexit situation is causing more harm than good. Among the options to consider, he stated they could “go all the way”, i.e. rejoin. A remark which, alongside the upwardly revised Q2 GDP series, has led to outperformance across UK assets this morning, with Gilts, GBP and the FTSE 100 the best performer or among the best in their respective market area.
  • However, while welcome, the upside was only c. 50 ticks at best in Gilts and leaves the benchmark only a point at best above the 83.72 contract low, with yields across the curve off highs, but also still in close proximity to such levels.
  • Across the Channel, OATs trade broadly in-line with their German counterpart, with gains of around 40 ticks at the time of writing. However, the OAT-Bund 10yr yield spread has widened further, to over 120bps and the widest since 2012. A move that comes after Tuesday’s debt update and the associated implications of the current plan for the debt-to-GDP ratio vs the EU’s EDP threshold.
  • Bunds themselves experienced a modest pullback off best levels on the German state CPIs, which printed broadly as expected but with a slight hawkish skew vs the mainland consensus at 13:00BST today. Albeit, the move was modest in nature, with Bunds holding just above 120.00, firmer by over 40 ticks, vs a 120.17 peak.
  • USTs bid, but the relative underperformers thus far, into a busy afternoon of data and potentially geopolitics. On the latter, we know that Iranian President Pezeshkian has now received the proposal via Aragchi from New York. We now await the leader's assessment of the matter. Elsewhere, PCE is due today and is perhaps more pertinent given the methodology changes included.
Context

Gilt rallies sparked by political signalling on EU relations fit a familiar pattern in UK rates: idiosyncratic political risk premia have been the recurring driver of Gilt under- and outperformance relative to core peers, and verbal openness to closer EU ties has historically compressed that premium without any policy substance behind it. The note's own caveat is the established tell: a 50-tick bounce that leaves the contract barely above its low is short-covering behaviour, not a repricing, and episodes of this kind have tended to fade unless followed by concrete negotiation mandates. The upward GDP revision is the more durable leg, but revisions to back quarters rarely shift the policy path on their own. The OAT-Bund spread pushing through 120bps to its widest in over a decade is the structurally more significant thread: French spread widening episodes have typically been driven by fiscal trajectory against EU deficit procedures rather than by growth, and the transmission channel is the perception of supply and EDP slippage rather than any ECB reaction, which keeps Bunds bid even as OATs lag. Worth noting the decoupling pattern: OATs rising in price while the spread widens is the classic signature of a core-led rally where France simply participates less. The follow-ons are the French debt plan's reception, any Commission commentary on the EDP path, and the US PCE methodology changes, which historically have injected one-off noise into the read on the Fed's preferred gauge.

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