UK Gilts Drive European Bond Market Bull Flattening, Yields Fall

In recent market movements, the European government bond market has seen significant shifts, with UK gilts leading a bull flattening trend. This development has partially reversed the bear steepening observed on Wednesday, following the UK Prime Minister's support for the Chancellor of the Exchequer. The European bond market has diverged from the US Treasury market, which experienced a decline due to stronger-than-expected employment data.

The UK gilts have been instrumental in driving the bull flattening trend in the European government bond market. This trend has led to a partial reversal of the bear steepening observed earlier in the week. The support from the UK Prime Minister for the Chancellor of the Exchequer has played a crucial role in this market movement. The Chancellor of the Exchequer emphasized their commitment to fiscal discipline, which has helped to stabilize the market. The Prime Minister's full support for the Chancellor, reiterated during a television address, further bolstered market confidence.

Italian government bonds have continued to perform well, maintaining their strong position in the market. This performance has been consistent, reflecting the stability and confidence in the Italian economy. The 5-year Italian government bond yield stood at approximately 2.67%, slightly lower than the French benchmark yield of 2.68%, despite the French bonds having a longer remaining maturity by about half a year. This indicates a strong demand for Italian bonds, which has contributed to the overall positive sentiment in the European bond market.

The bull flattening trend in the European government bond market has been driven by the UK gilts, with the Italian bonds also contributing to the overall positive sentiment. The support from the UK Prime Minister for the Chancellor of the Exchequer has been a key factor in this market movement, providing a sense of stability and confidence in the European bond market. The market's response to these developments has been positive, with yields on various European government bonds showing a downward trend. This includes a 5 basis point decrease in the German 10-year government bond yield to 2.62%, a 6 basis point decrease in the Italian 10-year government bond yield to 3.46%, and a 4 basis point decrease in the French 10-year government bond yield to 3.28%. The UK 10-year government bond yield also decreased by 7 basis points to 4.55%.