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BONDS: EGBs-GILTS CASH CLOSE: Gilts Underperform Pre-UK Budget

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Gilts underperformed EGBs Monday, with continued focus on the UK budget release this week.

  • Global core FI sold off overnight on easing geopolitical risk, after an Israeli attack on Iran proved more restrained than expected. Oil prices fell sharply and safe haven assets retreated.
  • Bunds and Gilts recovered strongly in morning trade, but gains were capped in early afternoon as oil recovered. Poor US auctions toward the European cash close also weighed.
  • The short-end outperformed on the German curve and underperformed on the UK's. ECB Dec 50bp rate cut probability extended to 45% from 40% prior, assisting the German bull steepening move.
  • The UK curve bear flattened, in contrast. While there was no overt driver for Gilt underperformance on the day, the UK budget release Wednesday remains a concern - MNI's Preview is here  (link). Our overall expectation is that the impact on BoE policy will likely be more subdued than the market currently fears; BoE cut estimates retreated slightly on the day.
  • Periphery/semi-core spreads tightened modestly. OATs outperformed overall (10Y -2.8bp to Bunds) after France avoided a Moody's downgrade Friday.
  • The key highlights this week remain the UK budget and Eurozone flash October inflation (beginning Wednesday)/Eurozone GDP, though Tuesday's schedule is more limited.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

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Gilts underperformed EGBs Monday, with continued focus on the UK budget release this week.

  • Global core FI sold off overnight on easing geopolitical risk, after an Israeli attack on Iran proved more restrained than expected. Oil prices fell sharply and safe haven assets retreated.
  • Bunds and Gilts recovered strongly in morning trade, but gains were capped in early afternoon as oil recovered. Poor US auctions toward the European cash close also weighed.
  • The short-end outperformed on the German curve and underperformed on the UK's. ECB Dec 50bp rate cut probability extended to 45% from 40% prior, assisting the German bull steepening move.
  • The UK curve bear flattened, in contrast. While there was no overt driver for Gilt underperformance on the day, the UK budget release Wednesday remains a concern - MNI's Preview is here  (link). Our overall expectation is that the impact on BoE policy will likely be more subdued than the market currently fears; BoE cut estimates retreated slightly on the day.
  • Periphery/semi-core spreads tightened modestly. OATs outperformed overall (10Y -2.8bp to Bunds) after France avoided a Moody's downgrade Friday.
  • The key highlights this week remain the UK budget and Eurozone flash October inflation (beginning Wednesday)/Eurozone GDP, though Tuesday's schedule is more limited.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

Keep reading...Show less