[MARKET ANALYSIS] USTs attempt to bounceback from recent losses; Gilts eye a potential leadership challenge

Global fixed benchmarks are firmer this morning, attempting to clamber off recent lows, as energy prices remain stable in today’s session. Geopolitical updates overnight were lacking, but attention this morning was on reports that a vessel off the coast of the UAE has been taken by unauthorised personnel. Markets await further details on the matter.
USTs are firmer by around 2+ ticks, and currently trading within a 110-02 to 110-06+ range. Strength, which appears to be a bounce-back from the lows seen on Wednesday, following a hotter-than-expected PPI report. Oxford Economics outlined that following both CPI and PPI, its PCE “nowcast points to a 3.8% y/y rise in headline prices.
Focus for US traders has also been on the Trump-Xi summit. So far, the pair have met, and the mood music following the meeting has been positive. President Trump told his counterpart that they are going to have a fantastic future together. In the aftermath of the meeting, a Reuters report suggested that the US approved around 10 Chinese firms to buy NVIDIA (NVDA) H200 chips. Ultimately, these are factors which have lifted global sentiment.
Bunds are stronger by c. 20 ticks, and trades within a 124.80 to 125.03 range. Price action has followed the above, with a lack of fundamental European drivers this morning. It is also worth noting that today is Ascension Day, celebrated across parts of Europe, so lower volumes are possible. From a policy perspective, ECB’s Chief Economist Lane stated on Wednesday that the surge in energy prices may require the Bank to deliver hikes. He continued his hawkish remarks by suggesting that an increase in selling price expectations suggests input cost pressures will map into higher output prices in the coming months. Markets await President Lagarde, at 10:15BST.
Gilts are performing in-line with peers, and trade within an 86.25 to 86.48 range. A strong GDP report this morning is having little follow-through on price action. ING opines that it does not change much for the BoE, which is “singularly focused on the impending inflation spike”. UK traders also eye the domestic political situation, with reports on Wednesday suggesting that Health Minister Streeting is preparing to resign as soon as today. Close allies suggest he has more than the required 81 MPs to launch a leadership contest, though others question these claims. Another growing risk is Former Deputy PM Rayner being cleared of any tax wrongdoing by the HMRC, which gives her better credibility should she decide to launch a challenge.
Overall, the Labour Party finds itself in a state of disarray, with PM Starmer ready to fight Streeting, Rayner or Burnham (though the latter currently remains outside of the race, given he is still not an MP).
JGBs underperform vs peers, following hawkish commentary from BoJ’s Masu, who stated that there is a need to raise rates at the earliest stage possible. The 10yr now resides at levels not seen since 1997. Elsewhere, the 30-year auction overnight gave an indication that demand remains strong at these elevated yields, as the b/c rose to 3.49x (prev. 3.12x). However, the wider tail suggests that some buyers are potentially holding out for a 4% yield. (Please see the 06:58 BST headline for further details).