Fiscal Speculation Trims Yesterday's Rally

Gilt markets give back some of yesterday’s rally, with focus on the potential for a cut to personal income tax on top of the widely expected 2ppt cut to national insurance.

• In terms of timelines surrounding any such personal income tax cuts, one Minister has suggested that the move could come today (per POLITICO).
• We assign relatively low odds to such a move given the limited fiscal headroom apparent at present and limited speculation.
• Broader focus seems to be on the potential for an income tax cut later this year, with suggestions that such a step will form part of the Conservative Party’s election manifesto.
• There is speculation that any related announcement could come via an additional pre-election Budget or the Autumn Statement (election timing dependent).
• Our full preview of today’s Budget can be found here.
• Gilt futures last -45 at 98.84 (range 98.79-99.22).
• Cash gilt yields are 3-4bp higher, with 10-Year yields at 4.05% after a brief and shallow foray below 4.00% on Tuesday.
• SONIA futures are flat to -5.5 through the blues, coming under pressure alongside gilts.
• BoE-dated OIS moves to price ~60bp of ’24 cuts vs. 62.5bp seen pre-open. Additional fiscal easing would support the higher for longer argument re: interest rates.
• The strip prices ~90% odds of a 25bp cut come the end of the June ’24 MPC.
• The major markers in that space stick to recent ranges.