[MARKET ANALYSIS] JGBs started the bearish action before reports around Chinese banks UST holdings added, Gilts gapped lower despite McSweeney's departure

• JGBs gapped lower by 30 ticks from 131.42 to 131.12 at the open, and then continued to trundle lower to a 131.10 trough; there was then a brief bounce overnight, before gradually declining back to the APAC low. Action today can be characterised by concern around potential increased spending and fiscal instability fears, but overall, the response to Takaichi's LDP securing a super majority has been within recent levels - see the 07:40GMT post for more details and next steps.
• For the BoJ, this action has increased the odds of a hike to around 60% in April. Post-election, Barclays has brought forward its expectations of a 25bps hike to April (prev. saw July), and increased its terminal forecast to 1.5% (prev. 1.25%).
• USTs are lower, given the above initially. More recently, pressure is a function of a Bloomberg report that China has urged banks to diversify exposure to US Treasuries amid heightened market risk, guidance that reportedly does not apply to state holdings. A report that pushed USTs to a 111-26 low. Fed speak ahead, though the individuals scheduled are, on face value, not particularly interesting. Reminder, the week ahead has NFP on Wednesday and CPI on Friday.
• Bunds followed the above. Interestingly, while they were initially hit by the Bloomberg report, the benchmark bounced off a 128.03 trough in short order. As the report is, potentially, a net-positive for EGBs long-term, as Chinese banks have to reposition their holdings.
• European specifics light, no move to a particularly strong Sentix release for January, with investors "... extremely confident about the German economy." Additionally, Sentix points to the APAC region as a growth driver while highlighting that the US is "relatively weak".
• Gilts hit on the ongoing Mandelson/McSweeney fallout. In brief, while McSweeney has resigned, the pressure around Starmer hasn't abated. Action that saw Gilts gap lower by 42 ticks before slipping another two to a 90.21 base. Since, the benchmark has rebounded by around 30 ticks, but remains in the red by some 10 ticks.
• The Spectator highlights that some ministers are concerned that Starmer could stand down at any moment. More likely, we could see Cabinet Ministers, privately initially and then possibly publicly, call for the PM to resign, and then they themselves may resign from Starmer's cabinet if he does not comply. Points that increase the likelihood of a leadership challenge against Starmer (though Labour rules make this difficult). Amidst this, we await a readout from a conversation the PM is expected to have with Labour MPs today (timing TBC). Further out, Politico highlights the 26th of February by-election and then, of course, the May local elections as the points to watch.

The bearish action in Japanese Government Bonds (JGBs) reflects growing concerns about fiscal instability linked to increased government spending, raising the likelihood of a Bank of Japan rate hike. Concurrently, U.S. Treasuries are under pressure due to reports of Chinese banks diversifying their UST holdings, heightening market risk sentiment. This overall shift in fixed income dynamics could influence rate expectations across the board, particularly ahead of upcoming CPI and NFP releases.