GILTS: Profit Taking & European Data Drive X-Market Outperformance Into Budget

Gilt outperformance extends further following firmer than-expected German regional level CPI data and a string of higher-than-expected GDP readings from the continent.

• Some of yesterday’s cross-market widening had already reversed in early trade, which, when coupled with some swap spread widening and cross-market outperformance, points to profit taking on gilt shorts ahead of today’s Budget.
• Our full Budget preview (including insight into fiscal policy moves and gilt issuance) is available here.
• Futures +55 at 95.95, off session highs (96.05).
• Initial technical levels provided by range extremes seen over the past couple of sessions. Resistance at the Oct 28 high (96.51), support at the Oct 29 low (95.29).
• Yields 4-6bp lower on the day, curve flattens.
• 5- to 20-Year yields hit the highest level since May/June yesterday, as pre-Budget positioning dominated.
• 5s/30s curve threatens a clean break of August lows.
• Gilts 5bp narrower vs. Bunds, last ~192.5bp.
• BoE-dated OIS little changed on the day, showing 23bp of cuts for November, 38bp of cuts through year-end and 101bp of cuts through June.
• SONIA futures little changed to +5.0, flattening as gilts rally.
• Our Budget preview provides deeper colour on our thoughts surrounding spill over into monetary policy.
• Our expectation is that the Budget’s impact on BoE policy will ultimately be more subdued than the market currently fears, as we expect infrastructure spending to be increased in a fairly gradual manner.