[MARKET ANALYSIS] JGBs underperform on Takaichi's "reflationist" BoJ candidates; USTs await Fed speak & NVDA

• Global benchmarks are broadly lower this morning. Pressure which also comes alongside JGB selling, which are currently lower by around 50 ticks. The situation is Japan appears to be shifting from optimism surrounding political stability, after PM Takaichi’s landslide victory, to one where traders are questioning “reflationist” policy; this refers to government’s ability to boost spending whilst also allowing inflation to run higher. Fears which were sparked by reports on Tuesday, that PM Takaichi expressed her apprehension to further BoJ hikes. Moreover, overnight it was reported that the government had recommended two academics, who have been described as “staunch reflationists”, by Chief Fixed Income strategist SBI Securities.
• USTs are lower by a handful of ticks, and currently holds within a 113-05+ to 113-10+ range, with price action ultimately sideways for much of the morning. Pressure this morning in tandem with easing AI disruption related fears, after Anthropic announced a slew of new partnerships. Overnight, markets tuned into President Trump’s State of the Union Address, in which he largely talked up the US economy; on trade, he suggested that tariffs will remain in place and nearly all countries want to keep the trade deals. On the Iran situation, he suggested that Iran wants to make a deal, and reiterated his own preference to solve the situation through diplomacy. Overall, his comments did not spur a reaction in US paper.
• Now attention turns to a number of Fed speakers, incl. Barkin, Schmid and Musalem, though the trio are not voters this year. Also in the spotlight are earnings from chip-giant NVIDIA. From a fixed income perspective, traders will care less-so about the metrics themselves, but more on any potential shift in sentiment.
• Bunds initially held around the unchanged mark early doors, before slipping slightly into the red; currently off by around 5 ticks, to hold within a 129.55-129.71 range. Earlier, Final German GDP (Q4) figures were unrevised, whilst the GfK Consumer Confidence metrics deteriorated from the prior vs expectations of a slight improvement. Head of NIM writes, “even though the economy appears to be recovering slightly, consumers remain sceptical”. Metrics which do not account for the latest US-EU trade updates, and can therefore be somewhat discounted – Bunds were little moved to the data. Sticking in Germany, Chancellor Merz is in China where he aims to deepen cooperation with China – there has been limited updates from his confab, so far. Now markets await EZ HICP Final metrics.
• Gilts follow peers lower, and currently lower by 10 ticks within a 92.94-92.84 range. Focus on Tuesday was on the BoE, where several MPC members appeared at the TSC hearing. Governor Bailey noted that would go into coming meetings asking if a cut is justified, adding that a rate cut at the next meeting is a genuinely open question. Market pricing was little moved following the hearing, and are still yet to definitively determine if the next cut will be in March or April. Elsewhere, CityAM reported that UK Chancellor Reeves is facing renewed calls to cut the bank tax as UK competitiveness lags.

The selling pressure in Japanese Government Bonds (JGBs) reflects growing skepticism about the new Prime Minister Takaichi's proposed reflationist policies, particularly her cautious stance on future Bank of Japan rate hikes. This shift may signal a broader market concern regarding the sustainability of Japan's inflation and spending strategies, which could impact global fixed income markets as traders reassess their outlook amid geopolitical and economic developments. Keep an eye on shifts in sentiment from upcoming Fed speakers and the broader implications for USTs as well.