GILTS: Outperforming Following CPI, Curve Steepens On Dovish BoE Repricing

Gilts off morning highs after softer-than-expected CPI data drove a rally at the open.

• Markets ignore the fact that the downside surprise was mostly driven by volatile components.
• The recent increase in short positioning in futures (flagged in recent days) will be contributing to the rally.
• Limited weakness following the 4.25% Jul-34 gilt auction, which generated the lowest cover ratio for an offering of the line since ’23, countered by an average tail (there was risk of a wider tail given recent gilt weakness/vol.).
• Futures +80 at 90.05, range 89.68-90.19.
• Bearish trend in futures intact, although today’s data puts that at risk. Initial support and resistance located at 88.96 and 90.31, respectively.
• Yields 6.5-11bp lower.
• 10s ~25bp off end ’24 highs, ~11bp off early ’25 highs.
• 5s30s on track for a fresh cycle closing high, last 86.4bp.
• 10s spread vs. Bunds ~5.5bp tighter at 218bp, driven by CPI.
• BoE-dated OIS showing 51bp of cuts vs. 36.5bp late yesterday (latter represented a fresh cycle hawkish extreme).
• SONIA futures +2.5 to +11.0.
• Dovish flow seen in SONIA options this morning (covered earlier).
• Comments from BoE dovish dissenter Taylor due this afternoon (16:30 London), with particular focus on his comments in light of the recent market adjustments.