Short-End Gilts Outperforming Early With Political Risk Seen Receding

Global core FI is on the front foot to start the week, with Gilts easily outperforming as UK policy risk is seen receding.

• Events over the weekend have all but assured Rishi Sunak will become the next UK Prime Minister (96% probability on betting exchanges) as soon as 1400BST, resulting a further pullback in yields as the ex-Chancellor is considered a less risky proposition fiscally.
• The UK curve has bull steepened, with BoE hike expectations continuing to be priced out.
• Otherwise, PMIs have been the focus of the European session so far. While they have missed to the downside almost across the board, there has been little market reaction, with more attention on UK politics and the ECB meet later this week.
• German yields have retraced most of their drop on the open; both the German and US curves have modestly twist-flattened, with US PMIs the focus of the rest of the session.
• Central banker appearances are scarce, with the customary pre-meeting quiet periods underway for both the Fed and ECB.

Latest cash yield levels:

• US: 2Y yield up 0.2bps at 4.4747%, 5Y down 2.1bps at 4.3198%, 10Y down 3.1bps at 4.1855%, 30Y down 3.1bps at 4.3025%.
• DE: 2Y yield up 0.1bps at 2.042%, 5Y down 0.8bps at 2.204%, 10Y down 1.5bps at 2.402%, 30Y down 1.7bps at 2.425%.
• UK: 2Y yield down 26.4bps at 3.535%, 5Y down 22bps at 3.933%, 10Y down 14.8bps at 3.906%, 30Y down 12.5bps at 3.935%.
• Italy / German 10Y spread 1.5bps tighter at 231.5bps