Bulk Of Early Weakness Holds, Key Technical Levels Untouched

Gilts have recovered from session lows, with the Dec 11 extremes in both futures and 10-Year yields remaining untested.

• Futures last print -37 at 97.75, 18 ticks off the base of the early 54-tick range.
• Cash yields are 2.0-3.5bp higher on the day, with a light steepening bias seen on the curve.
• When it comes to the recent cross-market widening of gilts vs. peers (spreads are off widest levels of the day across the curve) we point to the combination of heightened expectations surrounding pre-election UK fiscal stimulus and data releases, in addition to the related feedthrough from both into BoE-dated OIS pricing, as the meaningful drivers.
• Note that BoE-dated OIS now shows ~91bp of cuts through ’24, a little over 60bp off the late December dovish extremes.
• The moderation in the BoE cuts priced through the end of ’24 has comfortably outstripped the comparative move in ECB pricing since the start of last week (by ~22bp).
• SONIA futures are +0.5 to -5.0 through the blues. The reds are under the most pressure.
• Looking ahead, only lower tier local data is due today, which will likely leave focus on wider market matters and headline flow (the latest ECB decision and U.S. data provide the scheduled risk events of note).